1 Jan 2017
PMI Quarterly on China Manufacturing Jan 2017
PMI indicates a relatively steady expansion of the manufacturing sector
China’s manufacturing PMI climbed from 51.2 in October to 51.7 in November. The PMI then fell slightly to 51.4 in December, but was still the second highest level in 2016. The index readings in the past few months indicate that the manufacturing sector has expanded at a relatively steady pace, boding well for the development of the economy. (See exhibit 1)
It is noteworthy to recognize the discrepancy by size of enterprises. The PMI of ‘large enterprises’ advanced from 52.5 in October to 53.4 in November, and then stayed high at 53.2 in December. The latest reading indicates the relatively fast expansion of ‘large enterprises’. Meanwhile, the PMI of ‘medium enterprises’ improved from 49.9 in October to 50.1 in November. Nevertheless, the index dropped to 49.6 in December, below the critical 50-mark, indicating that ‘medium enterprises’ have started to contract recently. The PMI of ‘small enterprises’ fell from 48.3 in October to 47.4 in November, and further to 47.2 in December, showing that ‘small enterprises’ have contracted at a quicker pace. (See exhibit 2)
The recent trend of the headline PMI suggests that the economy has been on solid footing. Both the new orders index and the new export orders index have been above the critical 50-mark in recent months, indicating the expansion of new domestic and export orders. Against this backdrop, manufacturers have become more active in purchasing production inputs: the purchases of inputs index stayed high in the past three months, fluctuating between 52.1 and 52.9 throughout October to December. Meanwhile, the output index rose to 53.9 in November, the highest level since August 2014, and then fell to 53.3 in December, showing that the output growth has softened recently. Also noteworthy is that the input prices index reached 69.6 in December, the highest level since March 2011. The index has continued to go up since July last year, showing that the prices of production inputs have risen at a faster pace in the past few months. Cost pressure on manufacturers has been intensifying .
Looking ahead, the Chinese government will put more efforts into maintaining stable economic growth and improving the quality of economic development in near term. According to the official media’s report on the Central Economic Work Conference held in December 2016, the meeting which sets the key economic tasks for year 2017, China will adopt a prudent and neutral monetary policy to help maintain stable liquidity conditions, and will carry out a more active fiscal policy. Meanwhile, the government will accelerate the ‘supply-side reforms’, the main tasks of which include tackling the overcapacity problem, reducing housing inventories, de-leveraging, bringing down costs on enterprises and shoring up weak areas. As there are signs of stable demand growth, we predict that China’s economic growth will be relatively stable in coming future. Going forward, we expect the headline PMI to hover around 51.5 in 1Q17. We also forecast the real GDP growth to be around 6.7% yoy in 1Q17. That being said, challenges facing Chinese manufacturers, however, include greater uncertainty in the US trade policies as Trump assumes presidency in January, intense competition in the international market, stronger government’s efforts to cut excess capacities in various sectors, increasing labour and environmental costs, tough operating environment, reduction in return on capital as well as increasing amount of capital transferred out of industries. Overall, we expect that the industrial production (VAIO) growth will be around 6.2% yoy in 1Q17.
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