China's Economy: Steady Decline Over Past 3 Months Doesn't Bode Well

by: China Stock Research

The official manufacturing PMI for August was 51.1 (official release, Chinese), just missing the 51.2 consensus estimate, and down from 51.7 last month. Not surprisingly from the headline index, most of the sub-indexes were also lower on the month, however production and new orders helped buoy the overall index, both showing expansion but at a slower pace vs. July.

The decline in the new order index was due in part to new export orders showing a neutral reading (vs. expansion last month), and imports further weakening to a six-month low. The employment situation continued to look bleak, also dropping to one of the lowest levels of the year, although it has been quite soft all year (hovering near 48, signaling contraction).

The drop in the official reading wasn't nearly as severe as the change in the HSBC China Manufacturing PMI, the final reading for which was 50.2 (down from the earlier flash), something which may come as a minor relief to followers of China's economy.

Although this month's official reading was lower than the reading for July, the uptrend since lows seen near the start of the year appears ongoing. That point aside, the dip does suggest that there are still challenges ahead. The market may once again take an "it's so bad, it's good" view (i.e. applying a stimulus becomes a "must" not a "maybe"), however what form stimulus may take remains open to debate.

Note: figures above are all "final" readings, not estimates.

The aggregate PMI showed continued expansion (readings greater than 50-signal expansion, readings less than 50-signal contraction), however the underlying data showed a distinctly different picture for different sized businesses. The large enterprise PMI did decline MoM to 51.9, however the indexes for small and medium-sized businesses crossed over into contraction territory. Weakness in the small company index isn't really anything new (it has been sub-50 for over the past 12 months), however the weakness in the medium-sized index was a sharp reversal from previous months.

One possible conclusion is that the effects of China's mini-stimulus announced in April were mostly felt by medium/large businesses, but smaller companies are continuing to languish. Continued weakness in the SME space could have unpleasant consequences for the rest of China's economy, owing in part to the proportion of jobs that are with SME employers. One possible effect of continuing contraction for SMEs is a reduction in jobs, something which could ultimately impact consumption and undermine the government's efforts to shift to a more consumer-led economy.

Additional data scheduled for release this week (non-manufacturing PMI) should shed some more light on the consumer side of the story, however the steady decline over the past three months doesn't bode well.

China Manufacturing PMI Sub-Index Data Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14
Source: China National Bureau of Statistics
Large Enterprises 51.4 50.7 51.0 50.8 50.9 51.5 52.6 51.9
Medium Enterprises 49.5 49.4 49.2 50.3 51.4 51.1 50.1 49.9
Small Enterprises 47.1 48.9 49.3 48.8 48.8 48.4 50.1 49.1
Production Index 53.0 52.6 52.7 52.5 52.8 53.0 54.2 53.2
New Order Index 50.9 50.5 50.6 51.2 52.3 52.8 53.6 52.5
New Exports Orders Index 49.3 48.2 50.1 49.1 49.3 50.3 50.8 50.0
New Import Orders Index 48.2 46.5 49.1 48.6 49.0 49.2 49.3 48.5
Main Raw Materials Index 47.8 47.4 47.8 48.1 48.0 48.0 49.0 48.6
Employed Persons Index 48.2 48.0 48.3 48.3 48.2 48.6 48.3 48.2
Supplier Delivery Time Index 49.8 49.9 49.8 50.1 50.3 50.5 50.2 50.0
Open Orders Index 45.7 45.1 44.8 44.9 46.0 46.2 46.4 45.9
Finished Goods Inventory Index 46.5 47.8 48.3 47.3 47.1 47.3 47.6 48.1
Purchase Amounts Index 51.0 49.4 50.3 50.6 52.3 52.0 53.0 51.9
Main Raw Materials Purchase Price Index 49.2 47.7 44.4 48.3 50.0 50.1 50.5 49.3
Production Prices and Business Activities Index 51.3 61.8 62.7 59.6 56.2 54.8 55.3 57.9

Disclosure: None