September 2 , 2011
The NBS has released the latest PMI figures.
In their own words:
“China’s PMI is 50.9% for the month of August, up 0.2% from the previous month. The index is at lows not seen since March 2009. However, it is climbing away from the “critical” 50% mark [GCiS note: an international measure, below which signifies a decline from the previous month], to which it dropped four month ago, showing that growth is occurring in China’s manufacturing sector.”
The report then goes into the details by sector, which I’ll summarize below:
A 0.2% rise, mirroring the PMI. Drivers included food & beverage manufacturing, IT & telecoms, other electronics, tobacco and textiles. More sluggish industries included wood processing, wooden furniture, chemical fibers, polymers, non-metallic mineral products, transport equipment and textile capital goods.
Also of note, Chinese big business is faring much better than SMEs, with small businesses’ production falling below the 50% mark.
Have stayed at 51.1% consistently and are unchanged in August. Food, tobacco, telecoms & electronics and metallurgy are driving. Laggards include textile and transportation equipment manufacturing industries.
Raw Material Inventories
These have pushed about 1.2% higher, but from a sub-critical-point level of 47.6% to 48.8%, meaning that inventories are being run down. Chemicals and plastics are said to be “significantly” leading the declines.
Raw material pricing
The raw material PPI rose by 0.9% after three consecutive months’ decline. Purchasing managers in F&B, electronics, metallurgy, cap goods, pharma and chemicals are reporting higher pricing. Paper, cotton and otter fibrous materials are reportedly cheaper.
Employment declined by 0.1% to 50.4%. This is still above the critical 50% level, but given that August is one of the major hiring months for graduates, this is lower than expected. The report says that the growth industries are leading hiring.
NB. some of China’s cities are merging their districts. This is reducing population (only in a statistical sense, of course) and will be the subject of an upcoming post.
Lead times fell by 0.1%.
The NBS surveyed 820 purchasing managers across 28 industry segments. Weighting is as follows: New orders 30%; production 25%; employment 20%; supplier delivery time index 15%; raw materials inventory index 10%.
What does it all mean?
The report emphasizes that PMI is pulling away from the four month low. Newspapers are mixed in their analysis: some chose to focus on the growth, suggesting that the economy is getting back on a firmer footing. The WSJ said the numbers were “more upbeat” and the China Daily that “economic growth has stabilized”.
Not so fast though, said the FT’s Lex, in a column titled “China’s growth and prices puzzle” (in English) and a more sensational “China Stagflation” (in the free Chinese version), arguing that while not fitting the classic definition of stagflation, 6.4% CPI combined with a weak PMI showed that momentum in the economy was weak. Does Beijing continue fighting inflation with interest rate hikes, or turn its attention to economic productivity? Definitively the former, according to Premier Wen, who says that inflation still needs to be brought under control.
Of the industries in the index, the chemicals sector is the best proxy for real time economic activity. The fact that chemical producers aren’t stocking up means that they may be expecting further oil price declines (think paints & plastics) and their decline in sales shows that there is a genuine marginal dip. Non-ferrous metals, also a more market-driven group of commodities, showed declines of 5% or more in the latest PPI figures for August. So the “stag” part is visible, albeit mildly.
In terms of the ‘flation, high food prices have contributed to a higher than expected CPI (see previous posts on this). This was caused by poor precipitation in North China between late 2009 and early 2011. It has now subsided – I travel fairly frequently to parts of Hebei province and have observed a big increase in reservoir levels, as well as much greener countryside – and we will begin to see grain, fruit and veg prices easing (China is also tripling its grain imports from the USA). There is a structural level of inflation; caused partly by labor movement restrictions, capital controls and M2 creation, which, going by official targets, is around 4.5%. Depending on what happens in the rest of the world, we could see inflation down to below 6% by the end of the year.
Employment is interesting. It is officially hovering above 50% - however, given the highly politicized nature of employment and the fact that the government has the capacity to tell Chinese business to hire a given number of people in an area (and makes it hard to fire them), I suspect this rate is lower than reported.
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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.