July survey data signalled a renewed upturn in operating conditions faced by Chinese manufacturers, with output, new orders and buying activity all returning to growth. However, employment continued to decline and at a solid pace, which in turn contributed to the quickest rise in outstanding business since March 2011. Meanwhile, increased prices for raw materials led to a marked rise in average input costs, which companies generally passed on to clients in the form of higher output charges.
At 50.6 in July, the seasonally adjusted Purchasing Managers’ Index™ (PMI™) rose from 48.6 in June to signal a renewed improvement in operating conditions. Though only slight, it was the first strengthening in the health of the sector since February 2015.
Driving the headline index higher in July was a renewed rise in total new business. Though moderate, it was the first time that overall new orders had increased since March. Respondents commented that new products and improved marketing strategies had boosted new business. Data indicated that growth in new work was largely due to stronger domestic demand, however, as export sales declined marginally at the start of the third quarter.
In response to improved inflows of total new work, manufacturers raised their production for the first time in four months. The rate of expansion, though modest, was the fastest seen in two years.
Despite the upturn in new orders, goods producers continued to lower their staffing levels in July. According to respondents, job shedding was largely driven by efforts to reduce costs and raise productivity. Furthermore, the rate at which employment fell was solid, despite easing to its weakest for six months. A combination of lower workforce numbers and higher amounts of new work led to a build-up in the level of work-in-hand for the fifth month in a row. Moreover, the rate of accumulation was the fastest seen since March 2011.
Higher production contributed to a renewed expansion in purchasing activity. Though modest, it was the first time input buying had increased since March. Subsequently, inventories of inputs rose over the month, and at a moderate pace. Meanwhile, stocks of finished goods increased for the first time since January, albeit fractionally, which some firms attributed to greater output.
Stronger demand for inputs added pressure to supply chains in July, with average delivery times lengthening for the fifth successive month. That said, the degree to which times increased was marginal.
After a slight drop in June, average input costs increased across China’s manufacturing sector in July. Furthermore, the rate of inflation was the second-fastest since September 2013 (behind April 2016). According to respondents, higher prices for raw materials, particularly metals, had led to increased cost burdens. As a result, companies raised their prices charged and at a solid pace.