China manufacturing PMI dropped to three-month low in February

Despite slipping to a three-month low of 55.8 in February, the headline HSBC China Manufacturing Purchasing Managers’ Index posted a level indicative of a marked improvement of operating conditions in the Chinese manufacturing sector.

Chinese manufacturing production increased for the 11th month running in February. Despite easing to the slowest since last November, the rate of expansion was still marked. Where a rise in manufacturing output was signaled, respondents attributed growth to further gains in new business.

The level of new work received by Chinese manufacturers rose again in February. New business growth remained sharp, despite easing from January’s near-record. Those firms that reported a rise in new order intakes often linked this to firmer client demand. Export sales increased to the greatest extent since March 2005. Anecdotal evidence suggested that this mainly reflected improved economic conditions among a number of China’s key trading partners.

Staffing levels continued to rise in February, although the rate at which firms added to their workforce numbers was only marginal and the slowest in seven months. Business expansion plans and rising production requirements were cited by panelists as having supported employment growth.

Average input costs rose for the eighth consecutive month in February. Although much slower than one month previously, the rate of inflation was still considerable. Prices paid for aluminum, coal, oil, steel and zinc were all reported to have risen.

Latest data signaled that prices charged rose in February, albeit to a much lesser extent than one month ago. Those firms that reported an increase in factory gate prices widely attributed inflation to rising prices for a range of raw materials.

Purchasing activity increased markedly in February, largely as a result of rising output requirements. Subsequently, the average time taken by vendors to deliver inputs to manufacturers lengthened for the seventh month in succession. Data also signaled that firms accumulated pre-production goods at the fastest rate since the start of the series in April 2004. Panelists widely commented that higher stock levels reflected strong sales and output forecasts.

Commenting on the China Manufacturing PMI survey, Hongbin Qu, chief economist for China at HSBC, said: “Despite the moderation in the headline China Manufacturing PMI, growth momentum for China’s manufacturing sector remains strong, pointing to a further acceleration in industrial activities in the coming quarters.”