1 Oct 2016
PMI Quarterly on China Manufacturing Oct 2016
PMI indicates growth stabilization in the manufacturing sector and the economy
After rising from 49.9 in July to 50.4 in August, China’s manufacturing PMI stood at 50.4 in September. The index readings in recent months indicate growth stabilization in the manufacturing sector and the economy, in our view. (See exhibit 1)
It is noteworthy to recognize the discrepancy by size of enterprises. The PMI of ‘large enterprises’ advanced from 51.2 in July to 51.8 in August, and further to 52.6 in September. The uptrend of the index suggests that the situations facing ‘large enterprises’ have been improving. Meanwhile, the PMI of ‘medium enterprises’ stayed stable at 48.9 in July and August, but then fell to 48.2 in September, the lowest level since February this year. The September reading indicates that ’medium enterprises’ have contracted at a faster pace. The PMI of ‘small enterprises’ rose from 46.9 in July to 47.4 in August, before dropping to 46.1 in September. The PMI of ‘small enterprises’ has been lower than the PMIs of both ‘large enterprises’ and ‘medium enterprises’, indicating that ‘small enterprises’ are still facing relatively difficult situations. (See exhibit 2)
The recent trend of the headline PMI suggests that economic growth has stabilized. Besides, the new orders index stayed above the critical 50-mark in the past three months, indicating the continuous expansion in total new orders. Meanwhile, the output index rose to a fifteen-month high of 52.8 in September, showing that the output has expanded at a relatively fast pace recently. Moreover, confidence among purchasing managers may have improved as they have increased their purchases of inputs lately. After reaching its recent peak of 52.6 in August, the purchases of inputs index moderated to 51.9 in September, still the second highest level in six months. However, the input prices index has been above the critical 50-mark for eight consecutive months, showing an uptrend in prices of production inputs. Cost pressure on manufacturers has built up.
Looking ahead, the Chinese government will strive to maintain stable economic growth in near term. On the monetary front, the central bank will ensure abundant liquidity to support the real economy, though monetary policy is unlikely to be very loose in order to maintain exchange rate stability and curb asset bubbles. On the fiscal front, the government will increase fiscal expenditure as well as infrastructure investment. On 5 September, Premier Li Keqiang presided at a State Council meeting, suggesting that the government should strengthen its efforts to carry out a proactive fiscal policy and should focus on areas such as poverty relief, new industries, post disaster reconstruction, water conservancy facilities and other major infrastructure. 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. It is noteworthy that the State Council published the ‘Work Plan of Reducing Costs for Enterprises in the Real Economy’in late August. According to the plan, various government departments will introduce a series of measures to reduce the tax burden, as well as the costs of financing, institutional transaction, labour, energy and logistics on enterprises.
We predict that, as the positive impact of the government’s moves to boost domestic demand unfolds, China’s economic growth will be relatively stable in coming future. Going forward, we expect the headline PMI to hover around 50.5 in 4Q16. We also forecast the real GDP growth to be around 6.8% yoy in 4Q16. That being said, challenges facing Chinese manufacturers include greater economic uncertainty caused by the Deutsche Bank crisis and the ‘Brexit’ decision, heavy debt burden, increasing labour and environmental costs, intense competition in the international market, a rise in foreign trade protectionism and weaker luxury spending. Overall, we expect that the industrial production (VAIO) growth will accelerate to 6.5% yoy in 4Q16.
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