Operating Conditions in Chinese Maufacturing Sector Improve in December -CaixinChina General Manufacturing PMI
The health of China’s manufacturing sector continued to improve in December, with firms registering a further strong rise in output. However, the rate of new order growth eased to a three-month low, and export sales rose only slightly. At the same time, confidence towards the 12-month business outlook remained relatively weak, and staffing numbers stagnated. Nonetheless, a further rise in new work prompted firms to expand their purchasing activity and inventories, which in turn placed further strain on supply chains. Operating expenses rose for the fourth month in a row, albeit marginally, which underpinned a renewed increase in selling prices. The headline seasonally adjusted Purchasing Managers Index, a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy, posted 51.5 in December, down from 51.8 in November. The latest figure remained consistent with a modest improvement in the health of the sector, with conditions now strengthening in each of the past five months. That said, the latest PMI reading was the lowest seen since September.
Key Points
Production continues to increase strongly...
... but new order growth softens, and employment stagnates
Selling prices increase for the first time in six months
Weighing on the headline index was a softer upturn in total new business at the end of the year. The rate of new order growth was modest, having eased to a three-month low. Panel members suggested that demand both at home and abroad had improved, though export work continued to rise only slightly overall.
The sustained rise in new orders underpinned a further increase in production volumes during December. The rate of expansion remained strong overall, despite edging down for the second month in a row.
Staffing levels were unchanged in December, as a number of firms mentioned efforts to contain costs and boost efficiency. As a result, the level of outstanding business rose again, albeit at a weaker pace.
Purchasing activity rose for the sixth month in a row, though the rate of growth cooled from November. This, in turn, led to an increase in inventories of purchased items. Inventories of finished goods also expanded at the end of the year, which some companies linked to expectations that demand conditions will improve in the months ahead.
Firmer demand for inputs placed further pressure on supply chains, with average lead times for purchased items lengthening again in December.
At the same time, manufacturers registered a further rise in operating expenses, which was attributed to greater raw material and staffing costs. However, the rate of input price inflation was marginal and much softer than the series average. Nonetheless, the further increase in costs led companies to raise their selling prices for the first time since June, and at a modest rate.
Although Chinese goods producers generally expect output to rise over the next year, concerns over ongoing trade tensions, environmental protection policies and intense market competition meant that overall sentiment remained weaker than the historical trend.
Dr Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group, said “The Caixin China General Manufacturing PMI stood at 51.5 in December down from 51.8 in the previous month, indicating a moderate expansion of the manufacturing sector.
1) Domestic demand expanded, but less quickly than in the previous two months. While the subindex for total new orders fell further in December from its high in October the gauge for new export orders fell more slowly, suggesting growth in domestic demand is slowing more rapidly.
2) Production expanded at a relatively quick clip, helping stabilize the labor market. The output subindex remained at a relatively high level, despite dipping slightly. The employment subindex fell marginally from the previous month, to the border between contraction and expansion.
3) As production expanded at a relatively fast pace, input deliveries, order backlogs and inventories all saw positive changes. The subindex for suppliers' delivery times rose to its highest point since April, despite remaining in contractionary territory. The measure for backlogs of work continued its fall from Octobers recent high, but remained in expansionary territory. The subindex for inventories of purchased items rose further into positive territory, but the gauge for stocks of finished goods also rose and returned to expansionary territory.
4) Behind the good performance was an improvement in business confidence. The gauge for future output expectations rebounded, albeit remaining at a relatively low level in recent years.
5) Industrial product prices went up. Both the gauges for input costs and output prices rose slightly. Company profitability is likely to improve, as the gauge for output prices returned to expansionary territory.
China's manufacturing economy continued to stabilize in December although the expansion in demand was not as strong as the previous two months. Positive changes included improved business confidence, and strengthened willingness to increase production and inventories, which are beneficial to the job market Subdued business confidence was a major factor behind the economic slowdown this year. As the phase one trade deal between China and the U S. has sent out positive signals, there is room for a recovery in business confidence, which should be able to help stabilize the economy.”
Source : Strategic Research Institute