Behind China’s PMI smokescreen lies a bag of new year surprises
A closer look at the manufacturing Purchasing Managers’ Index reveals major stress points across factory floors in China
A minute 0.1 point decrease in China’s manufacturing PMI to 51.3 in January, released over the Lunar New Year break, excited almost none globally apart from the news robots over at the major financial media outlets. At Asia Times, we can’t afford to be like them, so everything is done like newshounds did it in the 1960s – old-fashioned grunt work.
When the manufacturing Purchasing Managers’ Index report is examined more diligently, admittedly a challenging task after endless festive meals, I came to realize the benign downtick is in fact a smokescreen to conceal several major stress points across factory floors in China. (Insert sound effects of a Trump bear growling from the Oval Office)
Companies are having a hell of a time passing on sharp cost increases, while smaller firms are heading down a slippery slope and overall market demand is looking a bit on the shy side.
Fortunately or surprisingly, these headwinds aren’t spoiling the jolly spirits of purchasing managers with the business expectations index rising 0.3 points to 58.5.
The only catch here is that the National Bureau of Statistics rejigged an entire year’s worth of this index from something that resembles a major stock market crash to one gentle uphill climb perfect for a sunny Sunday afternoon. In revising the factors of seasonal adjustment, according to the official statement, I suppose they have the final say.
The rest of the report does look fairly robust, as the headline figure suggests, especially with managers taking the offensive strategy of stocking up on raw material inventories and boosting imports. By size, large firms distinctly outperform on most measures.
The Year of the Rooster is off to a flying start, especially for the bigger birds, according to the latest official PMI survey. Just don’t place your eggs in the wrong basket.
All about the numbers
In January 2017, the NBS added a new associated PMI index tracking changes in the selling prices of manufactured products. The press release included historical data going back a year ago. The Ex-factory Price Index, shown above, is to be compared with the Input Price Index to provide a sense of the fluctuations for the overall production margin, which is looking quite ugly at the moment with a spread of around 10 points for three consecutive months already.
The core problem facing the Chinese manufacturing sector, explained by the China Federation of Logistics & Purchasing that was responsible for compiling the monthly reports, is that upstream raw material costs are rising too quickly, pushing up general manufacturing costs while companies are having trouble raising prices on their finished products. This constitutes a direct squeeze on profit margins, and may make manufacturers unwilling to expand output in the coming months.
Overall production pulled back slightly to 53.1, down 0.2 points, due to a throttle back of activities ahead of a relatively early Lunar New Year in late January. The data proves size matters, with the big getting bigger and the small getting smaller.
Even though large manufacturers slowed output, they are still leading the pack, growing at the fastest clip while their smaller peers are heading in the opposite direction.
The new orders index fell 0.4 points to 52.8 with the large, medium, and small enterprises showing readings of 55.4 (down 0.8), 51.5 (up 1.1), and 44.3 (down 2.0), respectively. New export orders rose 0.2 points to 50.3.
The forward-looking business expectations index has always been a personal favorite, but as mentioned above, the NBS has now revised the whole 2016 series. I plot the new and old here just to pay a tribute to the discontinued data points. As it stands now, there is optimism across the entire nation, hooray!
The apparent optimism in the coming year is compelling purchasing managers to do what they do best, and that is buy, buy, buy! Sub-indices for imports and raw material purchases are on a mild uptrend, regaining 0.4 and 0.5 points to 50.7 and 52.6, respectively, recovering some ground lost during December.
Best wishes for all readers who have made it to the very end. Thank you and have a prosperous Year of the Rooster!