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HSBC China Manufacturing PMI for Dec.at 48.7, Still Struggling:HSBC Report

12-30 12:09 Caijing

Chinese manufactures are still struggling as both domestic and external demands continue to cool.

December’s final PMI was revised down slightly from its initial flash reading of 49 to 48.7, but nevertheless stayed above the previous November print of 47.7 confirming that China’s pace of slowdown is stabilizing somewhat. That said, weakening external demand is starting to bite. This, plus the ongoing impact of property market corrections calls for more aggressive loosening on both the fiscal and monetary fronts to stabilize growth and jobs; especially with prices easing so rapidly. A hard landing should be avoided so long as easing measures continue to filter through in the coming months.

Facts

The final reading of HSBC’s China manufacturing PMI edged down to 48.7 in December from the initial flash reading of 49. While this confirms a slight improvement when compared with November’s final print of 47.7, it nevertheless extends a period of below-50 readings into the second consecutive month. This took 4Q11’s average quarterly reading to the lowest level since 1Q 2009.

The breakdown suggests that both output and new orders remained in contraction territory for the second month, although the intensity of the contraction eased to 49.4 and 46.9 respectively (compared to 46.1 and 45 respectively in November). However, new exports orders, which had held at levels above 50 for the previous two months, finally fell into contraction territory at 49.7 in December (it averaged 52 in October and November).

With new orders still sluggish, Chinese manufacturers are being forced to build up inventories of finished goods (the sub-index for which rose to 51.3 in December from 49.1 in November, well above its long term average of 48.6). The sub-index for quantity of purchases thus fell for the second month (49.2 in December vs. 49.1 in November), leading to a reduction in the stock of purchases (sub-index of which fell to a four month low of 47.8 in December, from 50.3 in November).

As a result, the new orders minus finished goods ratio deteriorated from negative 4.1 in November to negative 4.4 in December, the same as July 2010 but still better than the average of minus 7.1 recorded during 4Q 2008 and 1Q 2009.

Weak growth momentum meanwhile is finally starting to hurt job growth, as the initial flash results had suggested was happening. December’s employment sub-index declined to an eleven month low of 49.2 compared to 50.1 in November and the series’ long term average of 50.4.

Price-wise, disinflationary pressures continue to build. The input prices sub-index stayed well below the 50-neutral line for the second consecutive months at 44.3 (vs. 42 in November), as did the output price sub-index which rose only marginally to 43.8 in December from 43.3 in November.  

Implications

The slight improvement in the headline final PMI reading in December from November confirmed that the pace of China’s slowdown is starting to stabilize, partly in response to Beijing’s policy easing (the first reserve ratio cut this cycle took effective 5 December).

That said, details within the current picture provide cause for concern:

- China’s exports sectors, already cooling from a growth rate of over 20% in the first 11 months to around 13% y-o-y in November, is set to decelerate further, as heralded by the below-50 reading of December’s new exports orders sub-index. Despite the recent upside surprises in US economic data, we anticipate global economic growth will slow to 1.9% y-o-y in 2012 from an expected 2.6% in 2011, as the ongoing European financial crisis deepens the Eurozone’s recession and spills over to the rest of the world.

- Domestic demand has yet to regain meaningful momentum, not least because of ongoing property tightening measures. The continued poor performance of total new orders (relative to new exports orders) further underlines the weakness of China’s domestic situation, in sharp contrast to what happened during the 2008-09 financial crisis.

- If disinflationary pressures persist, profits will be squeezed. This is not helpful for either growth or employment. Industrial profits have already slowed significantly from 25.3% in the first ten months to 24.5% in the first eleven months.

- The slowdown is starting to affect new jobs creation. Given that China’s exports-oriented manufactures hire more than 30mn workers, the further deceleration expected in exports growth will likely weigh further upon job market conditions.

All these call for more decisive easing measures. On top of monetary easing mainly in the form of further reserve ratio cuts, we have long argued that fiscal policy can and should play a more important role in stabilize growth and jobs.

In addition to the recent raising of VAT and business tax thresholds for small business, we expect additional tax cuts for China’s exports-oriented companies. Fiscal spending on public housing, ongoing projects and social security should in turn all support China’s labour market stability.

Bottom line: Chinese manufactures are still struggling as both domestic and external demands continue to cool. The ongoing slow-down in China calls for more decisive easing measures from Beijing to stabilize growth, and in particular help exporters and small business.  

QU Hongbin -Co-head of Asian Economics Research
SUN Junwei - China Economist

 

Chart1. Slowdown is stabilizing, but growth momentum still weak

Chart1. Slowdown is stabilizing, but growth momentum still weak

Chart2. Weakening external demand is starting to bite  
Chart3. Disinflationary pressures continue to build


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