China Watch

Chinese manufacturing production continued to expand at a robust pace in November,
despite the rate of growth easing since October’s five-and-a-half year peak. At the same time,
companies reported a softer expansion of total new orders, while new export work was
broadly stable after a slight fall in October.

Meanwhile, cost-cutting initiatives underpinned a further fall in staff numbers, though the rate of job shedding was the slowest seen in a year-and-a-half. November also saw a sharp pick up in inflationary pressures, with both input costs and prices charged rising at the fastest rates since early-2011.

At 50.9 in November, the seasonally adjusted Purchasing Managers’ Index™ (PMI™) fell from a 27-month high of 51.2 in October, to signal a marginal improvement in overall operating conditions. Nonetheless, the health of the sector has now strengthened in each of the past three months,
which marks the longest period of improvement since late-2014.

Chinese manufacturers noted a further rise in production volumes during November, stretching the current sequence of expansion to five months. Though solid overall, the rate of output growth softened since October. Companies that raised production generally commented on
greater intakes of new work. However, in line with the trend for output, the rate of new order book expansion weakened since the previous month and was moderate overall.

A number of panellists suggested that stronger domestic demand was behind the latest rise in new
business. Furthermore, new export work was broadly unchanged in November, after a slight decline in the previous survey period.

Firms continued to increase their purchasing activity in November, with the rate of growth edging up to a four-month high. However, the use of inputs in the production process led to a marginal drop in inventories of purchased items for the second month in a row. In contrast, stocks of finished items rose slightly in November, which some firms attributed to increased output.

A lack of stock at suppliers contributed to a further lengthening of delivery times. That said, the rate at which vendor performance deteriorated was only marginal.

November signalled a further decline in Chinese manufacturing employment, as a number of companies sought to reduce their costs. That said, the rate of job shedding was the weakest seen in 18 months. Nonetheless, a combination of lower staff numbers and increased new work led to a further rise in outstanding business.

Inflationary pressures intensified over the month, with Chinese manufacturers signalling the sharpest increase in cost burdens since March 2011 during November. Anecdotal evidence suggested that higher prices for raw materials, particularly for items such as metals, had raised
overall input costs. In order to help protect their margins, firms generally raised their prices charged, and to the greatest extent since February 2011.

Caixin China Composite PMI™ data (which covers both manufacturing and services) indicated the fastest expansion in Chinese business activity since early 2013 during October. This was shown by the Composite Output Index rising from 51.4 in September to 52.9 at the start of the fourth quarter.

October survey data indicated that activity growth was predominantly supported by stronger growth in manufacturing output, though services activity growth also picked up from the previous month. Furthermore, goods producers registered the quickest expansion in production since early 2011. Business activity at services companies meanwhile rose at a moderate pace that was the fastest for four months. This was illustrated by the seasonally adjusted Caixin China General Services Business Activity Index rising from 52.0 to 52.4 in October.

Total new order growth also strengthened at the beginning of the fourth quarter, with both sectors reporting an improvement in underlying market conditions and a subsequent rise in customer demand. Manufacturers saw the fastest expansion in new order books for just over two years in October. Services providers saw a rate of new business growth that, though modest, was the quickest seen since June. The marked upturn at manufacturers and faster increase at service providers led composite new orders to increase at the strongest pace since November 2014.

Chinese manufacturers continued to cut their staff numbers during October, though the rate of reduction was the weakest since May 2015. Meanwhile, services companies expanded their payrolls for the second month in a row, with the rate of growth edging up to its strongest since January. Firms that hired additional workers generally commented on business expansion plans and expectations of future activity growth. Overall, Chinese employment declined at a marginal pace that was the slowest in the current 17-month sequence of job shedding.

The amount of unfinished work increased across both manufacturing companies and service providers during October, with panellists across both sectors linking the rise to increased new order intakes which exerted pressure on capacity. Goods producers saw a moderate increase in outstanding business overall. Meanwhile, it was the first increase in backlogs at services companies since May, albeit at a marginal pace. At the composite level, unfinished work rose at a pace that, though modest, was the fastest since March 2011.

Manufacturing companies reported the sharpest rate of input cost inflation since September 2011 in October amid reports of greater costs for raw materials. At the same time, input prices rose at a moderate pace across services companies. The much faster increase in costs for goods producers was the main factor leading composite input prices to rise at a solid pace that was the strongest in just over five years.

Selling prices for manufactured goods increased at the fastest rate since February 2011, which a number of panellists attributed to the passing on of higher input costs to clients. Prices charged for Chinese services was meanwhile little-changed from the previous month, with some companies mentioning that increased competitive pressures had limited their pricing power. Nonetheless, the marked rise in prices set by goods producers led composite output charges to increase at the quickest pace since April 2011.

Service providers remained generally positive that business activity would increase over the next year. Furthermore, the level of confidence improved to its second-strongest in eight months. Anecdotal evidence suggested that improving economic conditions, forecasts of an expanding market sector and new project developments could all boost activity.