PMI Quarterly on China Manufacturing

Transcription

1 PMI Quarterly on China Manufacturing IN THIS ISSUE : Headline PMI 2 Output 5 New orders & 7 new export orders Backlogs of orders 10 Stocks of finished 11 goods & major inputs Purchases of inputs 12 Input prices 14 Imports 17 Employment 20 Suppliers delivery time 22 June 2010 Issue 2 PMI moderates, suggesting overheating risk has subdued. Furthering tightening will be put on hold Output growth remained strong. New orders index fell more sharply than new export orders index, indicating that the decrease in demand was mainly domestic-led. Backlogs of orders index returned to the contractionary zone in May. Restocking activities have begun. Purchases of inputs have accelerated since March, though purchasing managers are showing increased cautiousness lately. Cost pressure eases, but still high. Import growth is set to decelerate. Employment index has stayed above 50 since March. Suppliers delivery has accelerated over the past three months. Helen Chin Tel: (852) helenchin@lf1937.com 11/F, LiFung Tower, 868 Cheung Sha Wan Road, Hong Kong Tel : (852) Fax : (852) lfdc@lf1937.com 1

2 PMI Quarterly on China Manufacturing 1. Headline PMI moderates, suggesting overheating risk has subdued. Furthering tightening will be put on hold After falling to a one-year low of 52.0 in February, China s manufacturing PMI rebounded strongly to 55.1 and 55.7 in March and April, indicating China s manufacturing sector was still on a solid track. The headline PMI then moderated to 53.9 in May, leading to concerns about the re-emergence of downside growth risk. However, we maintain our earlier view that we are not overly worried about an economic downturn, or a W-shaped recovery in China. The headline PMI has stayed above the expansionary 50-mark for 15 consecutive months, showing that the post-crisis recovery is sufficiently self-sustaining. The May PMI moderation was partly the result of government tightening on real estate speculation and local government borrowing, and was possibly overstated due to incomplete seasonal adjustment of the time series. (See exhibit 1) Looking forward, we expect the PMI to stay at around in 3Q10, as the full impact of the tightening measures and the European debt crisis on business sentiment gradually unfolds. It is also noteworthy that the Chinese policy-makers would be alerted by the latest PMI data to the risk of a sharp economic downturn, and might therefore delay further tightening measures such as interest rate hikes and RMB appreciation. Exhibit 1: Headline PMI, Jun May 2010 Exhibit 2 shows that the headline PMI moderation in May was largely attributable to the marked fall in the new orders index (weighs 30% in the computation of the headline PMI). Among the 10 sub-indices (i.e. excluding the suppliers delivery time index), 8 stayed in the expansionary zone throughout the previous three months, while backlogs of orders changed from expansion to contraction. The stocks of finished goods index has remained in the contractionary territory for 18 consecutive months. Almost all sub-indices registered lower readings in May compared to the previous two months. (See exhibit 3) 2

3 June 2010 Issue 2 Exhibit 2: Headline PMI and sub-indices, Jan May 2010 Exhibit 3: Headline PMI and all sub-indices, Mar - May

4 PMI Quarterly on China Manufacturing Most industrial sectors still look promising. 15 of the 20 industries surveyed registered headline PMIs above 50 in May. However, over the past three months sharp growth moderation was seen in sectors such as communications, IT & electronic equipment, electrical machinery & equipment and transport equipment. In particular, growth turned from positive to negative for chemical fibres, rubber & plastics, oil refining & coking and pharmaceuticals. On the other hand, some sectors witnessed improving momentum ( beverages, food, non-metal minerals and smelting of non-ferrous metals ) or maintained robust growth throughout the past three months ( general machinery and metal products ). China s manufacturing PMI has so far done a satisfactory job in predicting economic growth. Exhibit 4 plots the quarterly real GDP yoy growth rates versus the monthly PMIs since its inception. It could be seen that the PMI demonstrates a fairly good track record of forecasting the growth trend of the economy at least over the next few months. Based on this chart we may project that real GDP growth will moderate to around 10.5% in 2Q10, before moderating further to around 9.5% in 3Q10. The slowdown of economic growth will mainly be attributable to the government tightening on real estate speculation and local government borrowing. Downside risks also exist if the European debt crisis turns worse or if its impact on business sentiment turns out to be more serious than expected. Exhibit 4: Headline PMI and real GDP growth, Jan May 2010, China National Bureau of Statistics 4

5 June 2010 Issue 2 2. Output growth remained strong The output index rebounded from 54.3 in February to 58.4 in March, climbed further to 59.1 in April, and then moderated a bit to 58.2 in May. (See exhibit 5) Exhibit 5: Output index, Jun May 2010 Exhibit 6 shows that, so far, the output growth has mainly been fuelled by new orders growth instead of restocking activities. (We find only slightly negative correlations, or insignificantly positive correlations, between the output index and the stocks of finished goods index and its lags.) We also note that, although outputs and new orders had long confirmed their post-crisis recovery, manufacturers remained cautious about holding inventories. An upside of this is that when manufacturers have run out of stocks of finished goods or regained confidence to restock, it will provide impetus to output growth. Indeed, while the new orders index dropped markedly in May, the output index did not fall as much but remained supported it is logical to infer that, if the stocks of finished goods index had not risen sharply from 46.2 in April to 49.8 in May, the output index would have fallen more than it actually did. 5

6 PMI Quarterly on China Manufacturing Exhibit 6: Output, new orders and stocks of finished goods, Jan May 2010 A few infrastructure-related items showed strong output growth throughout the past three months: Electrical machinery & equipment, general machinery and metal products. Some other sectors witnessed improving output growth, including some consumer-oriented items ( beverages and food ), non-metal minerals, papermaking, printing, stationery & sporting goods and smelting of non-ferrous metals. On the other hand, output growth slackened off for oil refining & coking, pharmaceuticals and tobacco. Exhibit 7 demonstrates the correlation (with some lags) between the output index and the yoy growth of value-added of industrial output (VAIO). Since peaking at 20.7% yoy in Jan-Feb 2010, VAIO growth has trended downward to 16.5% yoy in May. Looking ahead, we expect VAIO growth to hover around 14%-16% yoy in 3Q10, constrained by government s credit tightening measures and actions to curb excess capacity but supported by better export outlook. 6

7 June 2010 Issue 2 Exhibit 7: Output index and industrial production growth, Jan May 2010, China National Bureau of Statistics 3. New orders index fell more sharply than new export orders index, indicating that the decrease in demand was mainly domestic-led Both new orders and new export orders indicated growth moderation in May. While the new export orders index fell by only 0.7 ppt. to 53.8 in May, the (total) new orders index dropped sharply from 59.3 in April to 54.8 in May. 1 This suggests that the latest moderation in demand was mostly domestic in nature. Although it has been observed that domestic demand has recovered more robustly and rapidly than foreign demand in the post-crisis period as indicated by the persistently higher series of the new orders index than the new export orders index since 1Q09 (see exhibit 8), we now predict export growth to take its turn to support economic growth in 2H10. 1 We have received a number of enquiries on this point. The new orders index covers both domestic orders and export orders. That is to say, the manufacturers are not asked to differentiate between domestic orders and export orders when filling in the questionnaires. 7

8 PMI Quarterly on China Manufacturing Exhibit 8: New orders index and new export orders index, Jan May of the 20 industries surveyed recorded contraction in new orders in May. Some industries saw rapidly deteriorating new orders situation over the past three months, among which are oil refining & coking, pharmaceuticals, smelting of non-ferrous metals and wood processing & furniture. Meanwhile, new orders situation improved for beverages and food. Growth of new orders remained strong throughout the past three months for some infrastructure-related items ( electrical machinery & equipment, general machinery and metal products ), export-oriented items ( garments, footwear & related products and textiles ) and non-metal minerals. Only 4 of the 20 industries surveyed recorded contraction in new export orders in May. The decline in new export orders during the last three months was most obvious for chemicals, oil refining & coking and pharmaceuticals. On the other hand, sectors which experienced improvements in new export orders during the same period include beverages, food, general machinery, non-metal minerals, smelting of non-ferrous metals, specialized machinery and tobacco. Growth of new export orders remained strong throughout the past three months for metal products and textiles. Exhibit 9 shows that the new orders index generally leads industrial production by about 2 to 3 months. Again, the projection based on the new orders index is that VAIO growth is likely to fall below 16% yoy in 3Q10. Exhibit 10 plots the new export orders index against the yoy growth rates of China s export. The correlation between the two is fairly high, with the new export orders index leading the export yoy growth rate by about 3 months. With the new export orders index staying relatively firm, we remain optimistic towards China s export outlook, despite the uncertainty posed by the European debt crisis. Besides, from exhibit 11 we can see that the new export orders index has been strongly correlated to the external economies, especially the developed economies. The OECD composite leading indicator 2 has bottomed out and continued to shoot upward to reach in April. We think China s export growth will probably stay robust at around 25%-30% in 3Q10 and 4Q10. The figure may be even higher if retailers in the western markets accelerate their restocking activities. The low comparison base last year also rules out the possibility that export growth may fall to low levels. 2 The OECD composite leading indicator, compiled by the Organization for Economic Cooperation and Development, is designed to provide early signals of turning points (peaks and troughs) between expansions and slowdowns of economic activity, and covers Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom, and United States. 8

9 June 2010 Issue 2 Exhibit 9: New orders index and industrial production growth, Jan May 2010, China National Bureau of Statistics Exhibit 10: New export orders index and export growth, Jan May 2010, China Customs 9

10 PMI Quarterly on China Manufacturing Exhibit 11: New export orders index and OECD composite leading indicator, Jan May 2010, Organization for Economic Cooperation and Development 4. Backlogs of orders index returned to the contractionary zone in May The backlogs of orders index rebounded strongly from 47.1 in Feb to 52.0 in March, climbed further to 53.4 in April, but then dipped into the contractionary zone again in May. (See exhibit 12) We expect it to stay slightly below 50 in the near future, as suggested by the apparently very high correlation between the sub-index and the headline PMI, together with the moderating trend of the headline PMI. (See exhibit 13) Exhibit 12: Backlogs of orders index, Jun May

11 June 2010 Issue 2 Exhibit 13: Backlogs of orders index and headline PMI, Jan May 2010 Only six industries reported increasing backlogs of orders throughout the previous three months: electrical machinery & equipment, garments, footwear & related products, general machinery, metal products, textiles and transport equipment. Five industries recorded declining backlogs of orders throughout the same period: chemicals, pharmaceuticals, specialized machinery, tobacco and wood processing & furniture. 5. Restocking activities have begun The stocks of finished goods index rose sharply from 46.2 in April to 49.8 in May, indicating that the destocking process, which has lasted for 18 months, has almost run its course. After dipping below the 50-mark in February, the stocks of major inputs index quickly rebounded in March, and has stayed in the expansionary zone since then. (See exhibit 14) Exhibit 14: Stocks of finished goods index and stocks of major inputs index, Jan May

12 PMI Quarterly on China Manufacturing Five sectors reported rising inventories of finished goods in May: Beverages, chemical fibres, rubber & plastics, garments, footwear & related products, pharmaceuticals and smelting of ferrous metals. In particular, beverages reported increases in inventories throughout the past three months. 12 of the 20 industries surveyed recorded expansion in stocks of major inputs, among which 6 recorded expansion throughout the last three months: Beverages, food, general machinery, metal products, textiles and tobacco. The start of restocking activities indicates improved incentives and confidence of Chinese manufacturers to hold inventories. It is anticipated that as the restocking processes get back on track and continue, they will help drive demand and output growth. 6. Purchases of inputs have accelerated since March, though purchasing managers are showing increased cautiousness lately After declining abruptly to 51.9 in February, the purchases of inputs index jumped to 58.1 in March and 60.1 in April, and then moderated to 56.0 in May. (See exhibit 15) The trend was most obvious for industries such as communications, IT & electronic equipment, electrical machinery & equipment, general machinery, metal products, papermaking, printing, stationery & sporting goods and textiles. A few industries still reported reduced purchases of major inputs in May: Oil refining & coking, pharmaceuticals, smelting of non-ferrous metals, tobacco and wood processing & furniture. Exhibit 15: Purchases of inputs index, Jun May

13 June 2010 Issue 2 A number of factors affect purchasing activities of manufacturers, among which the amount of new orders received by manufacturers has been the most important factor. Exhibit 16 plots the purchases of inputs index against the new orders index. The correlation between the two sub-indices is as high as This is intuitively easy to explain as manufacturers usually need to purchase extra inputs to cope with new orders. The purchases of major inputs also reflect corporate confidence. Exhibit 17 shows the association between the purchases of inputs index and the entrepreneur confidence index (ECI). Credit conditions could be another factor. Finally, exhibit 18 shows that the purchases of major inputs index generally leads the prices of major inputs by about 2 months, suggesting that the expected trend of inputs prices is a more important consideration than current input prices when making purchasing decisions. Exhibit 16: Purchases of inputs and new orders, Jan May 2010 Exhibit 17: Purchases of inputs index and entrepreneur confidence index, Jan May 2010, China National Bureau of Statistics 13

14 PMI Quarterly on China Manufacturing Exhibit 18: Purchases of inputs and prices of major inputs index, Jan May Cost pressure eases, but still high Chinese manufacturers have faced mounting cost pressure since Apr In particular, prices of major inputs have been rising at an accelerated pace since Nov Although the input prices index eased a bit in Feb 2010, it quickly rebounded in March, and then jumped to reach 72.6 in April. The April reading was the highest since Jul The index then dropped sharply by 13.7 ppt. to 58.9 in May. (See exhibit 19) Such high levels of the input prices index underline the problems of production cost pressure and squeezed producers margins, as well as suggesting stronger inflationary pressure on downstream prices in the near and medium term. The reduced cost pressure in May is likely to be temporary, as we believe it largely reflects the lower commodity prices dampened by the European debt crisis and the strengthening US dollar. Exhibit 19: Input prices index, Jun May

15 June 2010 Issue 2 Almost all industrial sectors indicated increasing cost pressure over the past three months, the exceptions being chemical fibres, rubber & plastics, smelting of non-ferrous metals and tobacco. Sectors which faced the most severe cost pressures were electrical machinery & equipment, general machinery, metal products, oil refining & coking, papermaking, printing, stationery & sporting goods, pharmaceuticals, smelting of ferrous metals and textiles. Exhibit 20 shows that the input prices index is useful as a leading indicator of upstream prices. The input prices index leads the yoy growth of the purchasing price index of raw material, fuel and power 3 by about 2 to 4 months. Based on the chart we project the yoy growth of the purchasing price index to peak at around 14% yoy in 3Q10. To show the association between the input prices index and midstream prices, we plot the input prices index against the yoy growth rates of the producer price index (PPI) 4 in exhibit 21. It is projected that the PPI growth will peak at around 8%-9% yoy in 3Q10. Finally, to see the extent to which input costs of Chinese manufacturers are affected by global commodity prices, exhibit 22 puts together the input prices index and the Thomson Reuters/ Jefferies CRB Index. 5 Exhibit 20: Input prices index and purchasing price index of raw material, fuel and power, Jan May 2010, China National Bureau of Statistics 3 The purchasing price index for raw material, fuel and power, compiled by China National Bureau of Statistics, measures the prices of production inputs such as raw materials, fuels and power, purchased by industrial enterprises. 4 The producer price index of industrial goods (PPI), compiled by China National Bureau of Statistics, measures the prices of industrial products when they are sold for the first time after production. 5 The Thomson Reuters/ Jefferies CRB Index, which comprises 19 commodities such as crude oil, aluminum, corn, cotton, gold, natural gas, soybeans, etc, has served as one of the most recognized measures of global commodities markets. 15

16 PMI Quarterly on China Manufacturing Exhibit 21: Input prices index and producer price index, Jan May 2010, China National Bureau of Statistics Exhibit 22: Input prices index and Thomson Reuters/ Jefferies CRB Index, Jan May 2010, Thomson Reuters 16

17 June 2010 Issue 2 Exhibit 23 tries to give a convenient way of assessing and analyzing the profitability of Chinese manufacturers since new orders represent source of new revenue and input prices represent production cost. If the former rises faster than the latter, profitability tends to improve, and vice versa. According to the PMI survey, since June last year the rise of input prices has outpaced the rise of new orders, hinting that Chinese manufacturers are going to face tougher time and more limited profit margins in the near future. Exhibit 23: Input prices and new orders, Jan May Import growth is set to decelerate The imports index rebounded and returned to the expansionary territory in March. The index was then on a downward trend to record 50.9 in May. (See exhibit 24) Exhibit 24: Imports index, Jun May

18 PMI Quarterly on China Manufacturing Sectors which reported particularly sharp deterioration in imports in Apr-May include chemicals, food, oil refining & coking, smelting of ferrous metals, tobacco and transport equipment. On the other hand, some infrastructurerelated items ( electrical machinery & equipment, general machinery and metal products ) and papermaking, printing, stationery & sporting goods experienced relatively strong import situation over the past three months. Exhibit 25 shows that the imports index is highly correlated to the import yoy growth rate (with some lags). We expect import growth to moderate to around 30%-40% yoy in 3Q10. Exhibit 26 illustrates the strong association between the imports index and the purchases of inputs index as currently around 30% of China s imports are under the category of processing trade 6. Finally, to see how heavily China s imports, or mainly imports of inputs, are affected by world commodity prices, we plot the imports index against the Thomson Reuters/ Jefferies CRB Index. It is found that the imports index is positively related to, and generally leads, global commodity prices. (See exhibit 27) Exhibit 25: Imports index and import growth, Jan May 2010, China Customs 6 Processing trade refers to the business activity of importing all or part of the raw and auxiliary materials, parts and components, accessories, and packaging materials from abroad, and re-exporting the finished products after processing or assembling by enterprises within the Chinese Mainland. 18

19 June 2010 Issue 2 Exhibit 26: Imports and purchases of inputs, Jan May 2010 Exhibit 27: Imports index and Thomson Reuters/ Jefferies CRB Index, Jan May 2010, Thomson Reuters 19

20 PMI Quarterly on China Manufacturing 9. Employment index has stayed above 50 since March After dipping marginally below 50 in February, the employment index gained 3.0 ppt. to reach 52.9 in March, and climbed further to 53.2 in April. The index moderated in May but still stayed above the 50-line. (See exhibit 28) Exhibit 28: Employment index, Jun May 2010 Exhibit 29: Employment and new export orders, Jan May

21 June 2010 Issue 2 Among the 20 industries surveyed, electrical machinery & equipment, garments, footwear & related products and metal products witnessed the biggest improvement in employment situation during the past three months; whereas beverages, chemical fibres, rubber & plastics and chemicals reported the biggest decline in employment in May. Exhibit 29 proves that the employment in China s manufacturing sector has relied heavily on the export sector. Exhibits 30 and 31 give our readers some ideas about the extent to which employment situation improves or deteriorates along with the manufacturing sector and the overall economy. Exhibit 30: Employment index and headline PMI, Jan May 2010 Exhibit 31: Employment index and real GDP growth, Jan May 2010, China National Bureau of Statistics 21

22 PMI Quarterly on China Manufacturing 10. Suppliers delivery has accelerated over the past three months Suppliers delivery slowed down in February, the first time in 18 months. The suppliers delivery time index quickly rebounded in March, and has stayed in the accelerating zone since then. (See exhibit 32) Sectors which reported accelerating suppliers delivery over the past three months include beverages, chemicals, electrical machinery & equipment, non-metal minerals and transport equipment. On the other hand, communications, IT & electronic equipment and pharmaceuticals experienced slowing suppliers delivery during the same period. Exhibit 32: Suppliers delivery time index, Jun May

23 June 2010 Issue 2 About the CFLP China Manufacturing PMI: The CFLP China Manufacturing Purchasing Managers Index (PMI) provides an early indication each month of economic activities in the Chinese manufacturing sector. It is compiled by China Federation of Logistics & Purchasing (CFLP) and China Logistics Information Centre (CLIC), based on data collected by the National Bureau of Statistics (NBS). is responsible for drafting and disseminating the English PMI report. Every month questionnaires are sent to over 700 manufacturing enterprises all over China. The data presented herein is compiled from the enterprises responses about their purchasing activities and supply situations. CFLP makes no representation regarding the data collection procedures, nor does it disclose any data of individual enterprises. The PMI should be compared to other economic data sources when used in decision-making. 727 manufacturing enterprises in 20 industries from Eastern, Central and Western China are surveyed. The sampling of the enterprises involves the use of Probability Proportional to Size Sampling (PPS), which means the selection of enterprises surveyed is largely based on each industry s contribution to GDP, and the representation of each geographical region. Survey responses reflect the change of each indicator, if any, in the current month compared to the previous month. There are 11 indicators in the survey: Output, New Orders, New Export Orders, Backlogs of Orders, Stocks of Finished Goods, Purchases of Inputs, Imports, Input Prices, Stocks of Major Inputs, Employment and Suppliers Delivery Times. For each of the indicators, this report shows the percentage of enterprises reporting each response, the difference between the percentage of responses in the positive economic direction and the negative economic direction, and the diffusion index. The diffusion index is the sum of the positive responses plus a half of those responding the same. Diffusion indices have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change and the scope of change. An index reading above 50% indicates an overall positive change in that variable; below 50%, an overall negative change. The PMI is a composite index based on the seasonally adjusted diffusion indices for five of the indicators with varying weights: New Orders 30%; Output 25%; Employment 20%; Suppliers Delivery Times 15%; and Stocks of Major Inputs 10%. A PMI reading above 50% indicates an overall expansion in the manufacturing sector; below 50, an overall contraction. Currently there are 22 countries and regions conducting the PMI survey and compilation, based on an internationally standardized methodology. 23

24 PMI Quarterly on China Manufacturing Member of the Li & Fung Group 利豐研究中心 Founded in Guangzhou in 1906, the Li & Fung Group is a multinational group of companies headquartered in Hong Kong, operating in three distinct core businesses - export sourcing, integrated distribution and retailing. The Li & Fung Group has a total staff of over 35,000 across more than 40 countries worldwide, with an annual turnover of around US$15.8 billion in One of its core competencies is Supply Chain Management (SCM). ( the Centre ) researches and publishes reports on wide-ranging topics: Chinese economy, consumer market, retail sector, trade-related issues, and consumer goods industries, etc. Apart from providing internal consultancy for the Group and its clients, the Centre also participates in formulating business strategies in the Mainland market. The Centre has been actively promoting the application of SCM. In 2003, the Centre published the book The Orchestrator of Global Supply Chain Management, which is regarded as a very useful reference among businessmen and academics in the Chinese mainland, Taiwan and Hong Kong. The revised and expanded edition was published in August Copyright All rights reserved. Though endeavours to have information presented in this document as accurate and updated as possible, it accepts no responsibility for any error, omission or misrepresentation. and/or its associates accept no responsibility for any direct, indirect or consequential loss that may arise from the use of information contained in this document. Reproduction or redistribution of this material without s prior written consent is prohibited. 24