Chinese manufacturing PMI reaches five-month high

At 52.9, up from 51.9 in August, the seasonally adjusted headline HSBC Purchasing Managers’ Index (PMI) pointed to a moderate improvement in Chinese manufacturing sector operating conditions that was the strongest in five months. The index has climbed over three points since posting below the neutral 50.0 threshold in July, suggesting that growth momentum in the sector continued to build during the latest survey period.

Manufacturing production in China rose further during the latest survey period. The rate of expansion was moderate, and slightly faster than the long-run series average. Where a rise in output was signaled, panelists primarily attributed growth to greater inflows of new business, which rose for the second month in a row. The rate of new business growth was solid, but contrasted with strong rates seen throughout Q1 2010. Anecdotal evidence suggested that the latest expansion was supported by stronger market demand. New export business rose in September, ending a three-month period of decline. However, the rate of growth was only marginal.

Staff numbers continued to rise in September, although the rate of job creation was only slight. Where a rise in employment was signaled, panelists attributed growth to increased new business wins. However, this was partly offset by reports of employee resignations and retirements.

Average input costs rose substantially in September, with the rate of inflation accelerating steeply since the preceding month. Respondents frequently cited higher raw material prices as the main driver of inflation, with steel mentioned in particular. As a result, manufacturers raised their output prices on average in an attempt to maintain operating margins. The rate of output price inflation was sharp, and the fastest in eight months.

Purchasing activity rose solidly in September, largely reflective of further gains in new business and a subsequent rise in production requirements. The latest increase, which extends the current period of growth to three months, was the fastest since April. Subsequently, average vendor performance deteriorated to the greatest extent in five months, with panelists citing supply shortages at vendors as having negatively impacted upon delivery schedules.

Commenting on the China Manufacturing PMI survey, Hongbin Qu, chief economist for China and co-head of Asian Economic Research at HSBC, said: “The upbeat reading of the HSBC China Manufacturing PMI implies that China's growth slowdown is slowing. A pick up in new orders means that domestic demand is still strong. Despite uncertainties on growth in global demand, we expect China to rely on continued investment in ongoing infrastructure projects and resilient consumption to grow by around 9 percent in the rest of the year and 2011.”