The Official Manufacturing PMI (Purchasing Managers’ Index) data was released yesterday by the National Bureau of Statistics, showing an unexpectedly sharp drop in the sector’s performance in February. Here’s the breakdown:
- The index fell to 50.3 from 51.3 in January, a 19-month low and only 0.3 points away from negative growth.
- Sub-indices also fell considerably for: output (50.7, down almost 3 points from January); new orders (51, down 1.6%); and imports, suggesting a broad dampening of demand.
- Demand for exports also dropped, by a smaller amount, to 49.0 from 49.5.
- Producer Price Index (PPI) of Inflation continued to rise, but decelerated
The decline far exceeded the forecasts of economists (as polled by Reuters), which predicted that the index would hold steady at 51 in February. Markets have responded sharply to the release, with the Shanghai Composite dropping 1% and the Hang Seng 1.5% in the last 24 hours.
Analysts had mixed opinions on the data:
Capital Economics see the drop as good evidence that the economy is starting to slow. The data corresponds to predictions made by their own in-house metric of Chinese GDP growth – the China Activity Proxy. Although it is possible that some of the lagging performance will turn around in the coming months as several industries phase out anti-pollution production caps, the overall outlook is that Chinese growth will be weaker in 2018.
Mizuho Securities stressed that there was no particular threat of a sudden slowdown in the Chinese manufacturing sector. They attribute the dip largely to temporary factory shutdowns during the Chinese New Year period, which may also impact on other indicators of economic activity. They predict continued growth in trade, and further slowing down of PPI.
ANZ Research acknowledge the breadth of the drop across all indices but refers to optimistic business sentiment from previous months to suggest a rebound from Q2 onwards. Furthermore, yesterday’s PMI will not be impactful on policy-making in the near-term.
The picture was made even more confusing this morning by the release of independent PMI figures by Caixin/Markit. Unlike the official figures, Caixin and Markit’s index offer a positive view of strength in the manufacturing sector’s performance, with a slight uptick to 51.6 from 51.5 in January. Other key points:
- Output and exports rose, though at a slower pace than in January.
- New order growth accelerated.
- Sentiment among business owners reached an all-time high, with confidence that client demand will continue to increase over the next 12 months.
- Inflation slowed to a seven-month low.
Capital Economics explain the divergence between the two indices by Caixin’s relative focus on smaller and medium-sized businesses with large exports, as opposed to large, domestically-oriented firms.
Taking the two indices together, then, would suggest that foreign demand for Chinese goods is robust but the domestic situation is seeing a shaper slowdown.
It should be noted that the Caixin data differs qualitatively from the official data in almost 40% of the months analyzed.