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«PMI Quarterly on China Manufacturing China Federation of PMI indicates signs of improvement in the Logistics & Purchasing manufacturing sector and ...»

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PMI Quarterly on China Manufacturing

China Federation of

PMI indicates signs of improvement in the

Logistics & Purchasing

manufacturing sector and the economy

China Federation of Logistics & Purchasing

(CFLP) is the logistics and purchasing

industry association approved by the State

Output growth accelerates.

Council. CFLP’s mission is to push forward

Both new orders index and new export orders index

the development of the logistics industry and

return to expansion.

the procurement businesses of both government and enterprises, as well as the Backlogs of orders continue to drop  circulation of factors of production in China.

Inventory levels of finished goods and production  The government authorizes the CFLP to produce industry statistics and set industry inputs fall.

standards. CFLP is also China’s Purchasing activities start to increase.

 representative in the Asian-Pacific Logistics Input prices index indicates bottoming out of prices of Federation (APLF) and the International  Federation of Purchasing and Supply production inputs.

Management (IFPSM).

Imports index returns to the expansionary zone.

 Fung Business Intelligence Employment in the manufacturing sector decreases at  Centre a slower pace.

Suppliers’ delivery reaccelerates The Fung Business Intelligence Centre (FBIC)  collects and analyses market data on Chinese manufacturers become more optimistic.

 sourcing, supply chains, distribution and retail.

It also provides thought leadership on technology and other key issues shaping their future.

Headquartered in Hong Kong, FBIC leverages unique relationships and information networks to track and report on trends and developments in China and other Asian countries. In addition, its New York-based Global Retail & Technology research team follows broader retail and technology trends, specialising in how they intersect and building collaborative knowledge communities around the revolution occurring worldwide at the retail interface.

Fung Business Intelligence Centre Helen Chin / helenchin@fung1937.com China Federation of Logistics & Purchasing Chen ZhongTao / czt@clic.org.cn

–  –  –

1. PMI indicates signs of improvement in the manufacturing sector and the economy China’s manufacturing PMI dropped from 49.4 in January to 49.0 in February. However, the PMI rebounded to 50.2 in March, returning to the expansionary zone for the first time since July last year. The latest PMI reading indicates signs of improvement in the manufacturing sector and the economy. (See exhibit 1) It is noteworthy to recognize the discrepancy by size of enterprises. The PMI of ‘large enterprises’ fell from 50.3 in January to 49.9 in February. However, in March, the index rose to 51.5, above the critical 50-mark, indicating that ‘large enterprises’ have expanded again. The PMI of ‘medium enterprises’ went up from 46.1 in January to 49.0 in February and 49.1 in March, indicating that ‘medium enterprises’ have contracted at a slower pace recently. The PMI of ‘small enterprises’ dropped markedly from 49.0 in January to 44.4 in February. The index then showed a strong rebound to 48.1 in March, indicating slower contraction of ‘small enterprises’ in the month. (See exhibit 2) In our view, the latest set of PMI data indicates signs of improvement in the manufacturing sector, largely attributable to the positive impact of the pro-growth policies carried out by the government. Both the new orders index and the new export orders index rose above the critical-50 mark in March, indicating an improvement in both domestic and export demand.

Besides, the output index rebounded to a six-month high of 52.3 in March, showing relatively fast growth of output. For the first time since August 2014, the input prices index rose above the critical 50-mark in February, and further went up to a 37-month high of 55.3 in March. The latest trend of the index suggests that prices of production inputs have been bottoming out.

To prevent China’s real GDP growth from falling below the government target of 6.5-7.0% yoy this year, the government is likely to further boost the economic growth in coming future. On the monetary front, China’s central bank will ensure abundant liquidity and lower financing costs to support the real economy. On the fiscal front, the government will lower taxes and fees.

According to the government, due to the measures to cut taxes and fees announced in the National People’s Congress in March, enterprises and individuals will save more than 500 billion yuan this year. Meanwhile, the government will continue to push forward structural reforms, especially the ‘supply-side reforms’.

In view of the signs of recovery in the property market and the positive impact of an accommodative monetary policy, we predict that China’s economic growth will stabilize in 2Q16. Going forward, we expect the headline PMI to hover around 50 in 2Q16. We also forecast

–  –  –

the real GDP growth to be around 6.8% yoy in 2Q16. In the coming months, industrial activities will be supported by the increase in public investment. That being said, challenges facing Chinese manufacturers remain, include wider exchange rate fluctuations, rising labour and environmental costs, slow growth of the global economy, foreign protectionism and weaker luxury spending. Overall, we expect the industrial production (VAIO) growth to go up slightly to around 6.5% yoy in 2Q16.





Exhibit 3 shows that the rebound in the headline PMI in March was mainly attributed to the rise in the output index (which weighs 25% in the computation of the headline PMI) and the new orders index (weighs 30%). Among the 11 sub-indices (i.e. excluding the suppliers’ delivery time index), only output index stayed in the expansionary zone over the past three months. Meanwhile, the indices of backlogs of orders, stocks of finished goods, stocks of major inputs and employment stayed below 50 throughout the past three months. In March, except for the stocks of finished goods index, all sub-indices were higher than their respective levels in the previous month. (See exhibit 4) China’s manufacturing PMI has so far done a satisfactory job in predicting economic growth.

Exhibit 5 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 project that the real GDP growth will be around 6.8% yoy in 2Q16.

Exhibit 1: Headline PMI, April 2014 to March 2016 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics

–  –  –

Exhibit 2: PMIs of large enterprises, medium enterprises and small enterprises, January to March Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics Exhibit 3: Headline PMI and sub-indices, January 2005 to March 2016 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics

–  –  –

Exhibit 4: Headline PMI and all sub-indices, January to March 2016 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics Exhibit 5: Headline PMI and real GDP growth, January 2005 to March 2016 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics

–  –  –

2. Output growth accelerates The output index fell from 51.4 in January to 50.2 in February, before rebounding to a six-month high of 52.3 in March. (See exhibit 6) This indicates an acceleration in output growth in March, which may imply a recovery in industrial activities in China.

Exhibit 7 shows that the output growth was mainly fuelled by new orders growth instead of restocking activities, as the stocks of finished goods index has stayed in the contractionary zone for thirty six consecutive months. However, output may grow strongly later when manufacturers have finally run out of their inventory or regained confidence to restock.

Exhibit 6: Output index, April 2014 to March 2016 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics Exhibit 7: Output, new orders and stocks of finished goods, January 2005 to March 2016 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics

–  –  –

Exhibit 8 demonstrates the correlation (with some lags) between the output index and the yoy growth of value-added of industrial output (VAIO). Looking ahead, we expect the VAIO growth to go up to around 6.5% yoy in 2Q16, as the output index has risen lately. In the coming months, industrial activities will be supported by the positive impact of an accommodative monetary policy and the increase in public investment. Challenges facing Chinese manufacturers, especially those in traditional industries, include wider fluctuations in exchange rate, rising labour and environmental costs, slow growth of the global economy, foreign protectionism and weaker luxury spending.

Exhibit 8: Output index and industrial production growth, January 2005 to March 2016 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics

3. Both new orders index and new export orders index return to expansion The new orders index dropped from 49.5 in January to 48.6 in February. Afterwards, in March, the index rebounded strongly to 51.4, returning to the expansionary zone. The index reading in March was the highest level since November 2014, showing that the overall new orders rose at a relatively fast pace in the month.1 Meanwhile, the new export orders index went up from 46.9 in January to 47.4 in February, and further to 50.2 in March. The index reading in March rose above the critical 50-mark for the first The ‘new orders index’ covers both domestic and export orders. That is to say, the manufacturers are not asked to differentiate between domestic and export orders when filling in questionnaires.

–  –  –

time since October 2014, suggesting that the mom growth of new export orders turned positive in the month. (See exhibit 9) Exhibit 9: New orders index and new export orders index, January 2005 to March 2016 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics Exhibit 10: New export orders index and export growth, January 2005 to March 2016 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics, China Customs Exhibit 10 plots the new export orders index against the yoy growth rates of China’s exports. The correlation between the two indices is fairly high. For the first time since October 2014, the new export orders index returned to the expansionary zone in March. Therefore, our confidence for China’s export prospects has improved. That being said, from exhibit 11 we can see that the new export orders index has been strongly correlated to the external economies, especially the

April 2016 Issue 24PMI Quarterly on China Manufacturing

developed economies. The OECD composite leading indicator2 has continued its downward trend in recent months, which suggests a still conservative outlook for China’s exports. All in all, we expect that China’s exports will continue to drop in 2Q16, though at a slower pace compared to the 9.6% yoy decline in 1Q16.

Exhibit 11: New export orders index and OECD composite leading indicator, January 2005 to March Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics, Organization for Economic Cooperation and Development

4. Backlogs of orders continue to drop The backlogs of orders index rose from 43.4 in January to 43.9 in February and 45.7 in March, but was still well below the critical 50-mark. The index has been in the contractionary zone since April 2012, indicating that backlogs of orders have continued to drop. (See exhibit 12) Looking ahead, we expect the index to go up further in the near term, as indicated by the apparently very high correlation between the sub-index and the headline PMI, and the recent rise in the headline PMI. (See exhibit 13) 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.

–  –  –

Exhibit 12: Backlogs of orders index, April 2014 to March 2016 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics Exhibit 13: Backlogs of orders index and headline PMI, January 2005 to March 2016 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics

5. Inventory levels of finished goods and production inputs fall The stocks of finished goods index registered 44.6, 46.4 and 46.0 in January, February and March respectively. The stocks of major inputs index rose from 46.8 in January to 48.0 in February and 48.2 in March. (Exhibit 14) Both indices stayed below the critical 50-mark in the past three months, indicating that the inventories of finished goods and production inputs held by manufacturers have been falling.

–  –  –

Exhibit 14: Stocks of finished goods index and stocks of major inputs index, January 2005 to March 2016 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics



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