China: Manufacturing Contraction Continues

Econintersect:  For the third month in a row the HSBC Manufacturing PMI (Purchasing Managers’ Index) for China is showing a contracting manufacturing sector.  The Flash (preliminary) reading is 48.1 for March 2014, down from 48.5 for February.  Readings below 50 correspond to negative growth.  A rebound had been expected following what was thought to have been a slower February due to the Chinese New Year celebration.  For the first time in four months export orders increased but two other key components, output and new orders, weakened further.

Highlights:

• Manufacturing PMI^TM drops further below 50;  adds to evidence of GDP slowdown in Q1
• Falling orders point to ongoing weak domestic demand, but relief as exports return to growth
• Government’s 7.5% 2014 growth target at risk
• Input prices and output charges fall sharply

Chris Williams, Chief Ecionomist for Markit, described the latest data thusly:

Business conditions in China’s manufacturing economy deteriorated at the fastest rate since last July in March, according to the flash PMI produced by Markit for HSBC. The deterioration points to a slowdown in GDP growth in the first quarter and raises the spectre of the economy failing to meet the government’s 7.5% growth target in 2014.

At 48.1, down from 48.5 in February, the PMI fell below the 50.0 no change level for a third month running in March. Output and new orders showed the largest falls since September 2012 and July 2013 respectively.

A further slight shortening of supplier delivery times (a disappointing sign of suppliers being less busy), as well as further modest falls in both employment and inventories, also helped keep the PMI below 50.

However, it was not all bad news. The rate of job losses eased to the weakest seen over the past six months, the rate of inventory reduction slowed and, perhaps most encouraging of all, new export orders rose for the first time in four months, staging the largest increase (albeit by a small margin) since November 2012.

The stronger rate of decline of overall orders in the face of the export gain suggests that domestic demand remains the key drag on the economy.

7.5% growth target under threat

The accelerating rate of decline in production and new orders, the latter hinting at ongoing production weakness in April, therefore raises the possibility that economic growth slowed in the first quarter and could weaken further in the second quarter.

The data are consistent with annual GDP growth falling to 7.5% at most in the first quarter, having already dipped to 7.7% in the fourth quarter of last year. At 48.7, the average reading of the manufacturing PMI in the first quarter compares with 50.7 in the fourth quarter, and is the lowest average since the third quarter of 2012.

The weak first quarter and sluggish momentum moving into the second quarter means the government’s modest 7.5% growth target for the year may already be looking optimistic, and suggests a heightened need for further measures to boost domestic demand.

Input prices and output charges fall sharply

With the economy slowing, manufacturers reported that suppliers’ delivery times shortened slightly again in March, often reflecting suppliers being less busy. Of all the survey indices, the Suppliers’ Delivery Times Index is the best advance indication of producer and consumer price trends, and the shortening of lead times is consistent with consumer price inflation cooling further from the 13-month low of 2.0% seen in February.

With suppliers increasingly competing on price to win customers, manufacturers’ input costs fell at the fastest rate since August 2012, dropping for a third consecutive month. Lower costs and intense competition meanwhile caused manufacturers to lower their own prices in many cases, which resulted in the largest drop in average factory gate prices since June 2012. The data therefore indicate that the annual rate of producer price inflation will deteriorate further from the 2.0% rate of decline seen in February.

Employment still falling

Finally, factories cut their headcounts for the eleventh time in the past 12 months, albeit with the rate of job shedding easing to the weakest seen in six months. But a slight fall in backlogs of work for a second successive month suggests that factories may remain under pressure in April to reduce capacity in line with the weakening order book situation.

John Lounsbury

Sources:

• Factories report steepening downturn in March (Press Release, Markit, 24 March 2014)

• New worries on China growth as flash PMI shows contraction (Adam Rose, Reuters, 25 March 2014)