China's Manufacturing PMI Takes A Turn For The Worse

by: Prieur du Plessis

The CFLP Manufacturing PMI collapsed to 49.0 in November from 50.4 in October. It came as a surprise as the PMI in November is normally somewhat stronger than in October. Although the PMI’s trend since March has been significantly below previous “normal” years (crisis years excluded), the collapse of the PMI indicates that the manufacturing sector took a turn for the worse in November. It is no wonder the PBoC announced on Wednesday that the reserve requirement ratio of banks would be lowered by 50 basis points – the first time in three years.

Click on graphs below to enlarge:

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

The PBoC is taking the same action as it did in 2008 when the PMI started to contract on a seasonally adjusted basis. November marked the first contraction on a seasonally adjusted basis since February 2009 as the PMI collapsed to 48.3 from 50.6 in October.

Sources: CFLP; Li & Fung; Plexus Asset Management

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

The significant slowdown echoes what is happening in Japan’s manufacturing sector. According to Markit, Japan’s PMI slumped to 49.1 from 50.6 in October.

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

The weakness in China’s manufacturing sector is especially evident when my calculated seasonal trend is compared to the PMI.

Sources: CFLP; Li & Fung; Plexus Asset Management

The outlook for the manufacturing sector in December is grim. The stocks-to-orders ratios lead the PMI by approximately one month. Stocks of major inputs remain high compared to orders. (Please note the reverse axis.)

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

That is despite a significant contraction and significant weakness compared to “normal” years.

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

Stocks of finished goods are accumulating at a faster rate.

Sources: CFLP; Li & Fung; Plexus Asset Management

Stocks of finished goods relative to orders have surged. (Please note the reverse axis.)

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

Imports continue to contract.

Sources: CFLP; Li & Fung; Plexus Asset Management

The decline in export orders is accelerating.

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

China’s sudden economic slowdown will be highlighted early next week when the CFLP Non-manufacturing PMI for November is released. I expect a significant drop to approximately 50 or even lower from 57.7 in October. However, most of the drop can be attributed to seasonal factors.

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

My seasonally adjusted non-manufacturing PMI has been in a clear downtrend since March this year.

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

Yes, expect some more monetary policy actions by the PBoC; failing which China’s equity market will be in trouble.

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