China's Manufacturing PMI Data Disappoints Again: Monetary Policy Adjustments Ahead?

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by: Prieur du Plessis

The CFLP manufacturing PMI for October dropped to 50.4 from 51.2 in September. The weakening trend was broad based except in the case of stocks of finished goods, which edged upwards.

Index: Manufacturing

Seasonally adjusted index

Compared to previous month

Direction

PMI

50.4

Lower

Expanding

Output

52.3

Lower

Expanding

New Orders

50.5

Lower

Expanding

New Export Orders

48.6

Lower

Contracting

Backlogs of Orders

46.0

Lower

Contracting

Stocks of Finished Goods

50.3

Higher

Expanding

Purchases of Inputs

50.7

Lower

Expanding

Imports

47.0

Lower

Contracting

Input Prices

46.2

Lower

Contracting

Stocks of Major Inputs

48.5

Lower

Contracting

Employment

49.7

Lower

Contracting

Suppliers’ Delivery Time

50.7

Higher

Quickening

Click to enlarge

Source: Li & Fung.

The lower PMI is contrary to the HSBC Purchasing Managers’ Index for China, which signaled a stronger expansion by rising to 51.0 in October from 49.9 in September.

The somewhat weaker trend in the CFLP PMI compared to September was in line with that of previous “normal” years (2008/2009 excluded due to the great financial crisis), but it is clear how weak the manufacturing sector is compared to previous years.

Click on charts below to enlarge:

Click to enlarge

Sources: Li & Fung; CFLP; Plexus Asset Management.

Although the CFLP PMI Manufacturing Index is supposed to be seasonally adjusted, a further seasonal pattern is evident in the graph above. I therefore adjusted the CFLP PMI further to get a clearer picture of the underlying trend. On my seasonally adjusted basis the PMI actually improved from 49.9 to 50.6. The severe knock in global trade as a result of the Eurozone sovereign debt crisis in September is especially evident in my seasonally adjusted CFLP PMI.

Click to enlarge

Sources: Li & Fung; CFLP; Plexus Asset Management.

The interrelationship between the manufacturing sectors in China and Japan continues as, according to Markit, Japan’s manufacturing PMI posted 50.6 in October compared to 49.3 in September. According to Markit the acceleration in Japan’s manufacturing sector occurred despite the fact that new export orders contracted for the 8th consecutive month mainly as a result of weak demand from China and adverse exchange rate factors. Perhaps trade between Japan and China is picking up?

Click to enlarge

Sources: Li & Fung; CFLP; Markit; Plexus Asset Management.

Stock levels in China’s manufacturing sector remain high compared to the level of new orders. The ratios of stocks of major inputs compared to new orders and stocks of finished goods to new orders point to a relatively unchanged CFLP Manufacturing PMI in November as the ratios tend to lead the PMI by one month.

Click to enlarge

Sources: Li & Fung; CFLP; Plexus Asset Management.

Click to enlarge

Sources: Li & Fung; CFLP; Plexus Asset Management.

November is historically a somewhat stronger month than October and a slight uptick in November’s CFLP PMI can therefore be expected. That is unless Japan’s manufacturing sector accelerates further.

Click to enlarge

Sources: Li & Fung; CFLP; Plexus Asset Management.

But what are the markets saying? The Shanghai Composite Index is pointing to a relatively unchanged CFLP Manufacturing PMI at this stage.

Click to enlarge

Sources: Li & Fung; CFLP; I-Net Bridge; Plexus Asset Management.

With input prices contracting the threat of higher inflation has receded. That, together with the significant lower growth in the manufacturing sector, may compel the Chinese authorities to relax monetary policy and cut rates soon.