Whether you blame it on falling global demand or troublesome domestic weather, it appears that China’s factories are slowing down. Output growth in February was the slowest seen since March 2007 as CLSA’s Purchasing Managers’ Index (PMI) – which is intended to give a picture of the manufacturing climate in general – fell for the third month in a row.
The bad weather hit both production and deliveries but CLSA said the dip in the PMI was perhaps less anomaly and more part of an underlying trend. All of the individual indices that make up the PMI were down in February, with the exception of stocks of finished goods, which suggests things might not be flying off the shelves like they once were. However, it’s worth pointing out that growth in new orders, while down on the previous month, remains robust – and this is largely due to strong domestic demand rather than export orders, which once again saw modest growth.
February’s input and output cost indices were also down from the record highs seen in December, a development that may seem at odds with the current climate of domestic inflation and rising global commodity prices. But prices are still above the long-term average and manufacturers are expected to encounter profit pressure as they try – and perhaps ultimately fail – to pass on a higher proportion of production costs to the consumer.
This is in keeping with the conclusion drawn by Andy Rothman, CLSA’s China macro strategist, writing in the March issue of China Economic Review: The key issue for equity investors in China this year is margin squeeze.