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January PMI: calculation gap
 

Janurary 31 , 2012

China’s national bureau of statistics has just published January’s PMI. The index is at 50.5% and is hovering above the 50% mark, below which the manufacturing sector is said to be in contraction and is below the 52.9% recorded this time last year.

Production nudged up slightly from December to 53.6% and is the highest component of the index. New orders are also up to 50.4% for January. That’s the good news.

The other three components of the index: raw materials, employment, and lead times all remain below 50%. Employment, which I mentioned in a previous post, is likely to gain greater attention this year has fallen from 48.7% to 47.1%. January rarely sees high levels of hiring in China. Employees typically wait until after collecting their Spring Festival bonus to change jobs, while employers, penalized if they fire staff, use a small or absent bonus to nudge unwanted staff towards the door. This time last year employment dropped by a similar amount, from 51.5% to 49.0% when it was also the index laggard – from the horse’s mouth:

“In 20 industry categories, only seven (beverage manufacturing, petroleum processing and coking, non-ferrous and ferrous processing) showed increases in employment, with below the index’s critical point.”

Overall, the NBS is rosy in its analysis, saying that production is expanding and that demand is robust.

Donning spectacles of a not-so-rosy shading is Markit / HSBC’s PMI. It states that China’s manufacturing sector has remained below 50% in both December and January. New orders are down, along with purchases and backlog. Lead times are up (although this isn’t explained in the press release, it agrees with the NBS – my take is that this could be seasonal and a function of credit availability). The report states that there is “still weak growth momentum of manufacturing activities into the New Year, despite the upside surprise of December IP growth due to the front-loaded production ahead of the early Chinese New Year.”

The different pictures NBS and Markit paint of the economy comes down to their different approaches to survey design.

By the looks of it, both are taking longitudinal surveys, quota sampled from geographic strata, with an industry weighting. Both indexes are weighted the same. Markit’s sample is 400 companies and the NBS’s is 820 companies.

However, Markit uses a system of absolute percentages in each category, whereas NBS uses PPS (probability proportionate to size - i.e., answers are weighted by company size). This means that the NBS’s data is more reflective of larger companies in the economy. PPS is very useful for industry sizing and segmentation mapping (we use it for most of our work) and so I’d go out on a bit of a limb here and say that NBS is probably folding its PMI questions into a wider survey, whereas Markit is focused only on PMI. If so, I would expect that Markit’s index is more representative.  

I would be very interested to learn more about the ownership breakdown of their sample (e.g., state vs non-state owned companies). This is very important as SOEs have guaranteed markets, financing, employment quotas and can call on government firepower for raw materials negotiating, whereas other types of companies may not. There is a widening gap between the SOEs and non-SOEs in the domestic economy that will need to be captured and accounted for in order for indexes to remain relevant.

 

 

About GCiS China Strategic Research

GCiS (www.GCiS.com.cn) is a China-based market research and advisory firm focused on business to business markets. Since 1997, GCiS has been working with leading multinationals in sectors ranging from technology to industrial markets, medical, chemicals, resources, building and constructions and a few others.

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