Operating conditions stagnated across China’s manufacturing sector during August, after a marginal improvement in the previous month. Production and total new orders both rose at slower rates, while export sales continued to decline. Job shedding meanwhile persisted, though the latest reduction in payrolls was the slowest seen in 2016 to date. This in turn contributed to a further rise in backlogs of work. Price pressures eased, with both input costs and prices charged increasing at weaker rates than seen in July.
The seasonally adjusted Purchasing Managers’ Index™ (PMI™) fell from 50.6 in July to the no-change mark of 50.0 in August. This signalled stagnant operating conditions in the latest survey period, following an improvement in the health of the sector in the previous month.
Manufacturing production rose for the second successive month in August, though the rate of expansion waned from July’s two-year high and was moderate. A number of panellists commented that output rose in line with new order growth. Reflective of the trend for production, total new business increased at a softer pace in August, and rose marginally overall. Data indicated that weak foreign demand continued to weigh on total new work, with export sales declining for the ninth month in a row during August (albeit marginally). There were also reports that relatively subdued market conditions had weighed on overall sales in August.
Manufacturers signalled sustained job shedding in August. Although the rate of payroll cuts eased to its weakest in the year to date, it remained marked overall, with a number of firms choosing to lower staffing levels as part of efforts to raise efficiency. Fewer staff and growth in new work contributed to a further rise in the level of outstanding business. That said, the rate of backlog accumulation was slower than seen in the previous month.
Goods producers raised their input buying during August to support higher production, though the rate of growth was only slight. Stocks of finished items meanwhile rose only fractionally, while cautious inventory policies led inventories of purchased goods to be broadly unchanged from the previous month.
Although demand for inputs increased, average supplier performance was little changed from the previous month in August. This contrasted with lengthening delivery times in each of the prior five months.
Latest survey data signalled increased average cost burdens during August, which marked the fifth time in sixth months that inflation has been reported. That said, the rate of increase was weaker than seen in July and only modest. Nonetheless, some companies chose to pass on their higher cost burdens to clients in the form of higher selling prices. The rate of charge inflation eased from the previous month, however, and was marginal overall.
The Official PMI:
The manufacturing purchasing managers’ index published by the National Bureau of Statistics rose to 50.4 in August, back above the 50-point line delineating growth from contraction after falling into contraction in July. The reading was well above a median forecast from economists of 49.8.
The bureau in an explanatory note chalked the gains up to five factors: steadying growth in production; recovering market demand; progress on supply-side reforms, evidenced by gains from gauges tracking high-tech and consumer goods; a pickup in purchasing activity at businesses; and growing confidence in business outlook among enterprises.
But those gains were once again concentrated among large-scale enterprises, which saw a sub-index for activity come in at 51.8, up 0.6 percentage points. Mid-sized businesses remained in contraction with a second straight reading of 48.9, while smaller businesses recovered half a percentage point from July’s reading but remained well below a return to growth at 47.4.
In non-manufacturing sectors, activity growth slowed from the previous month to 53.5 thanks to a softening in the construction sector, the sub-index for which dropped 2.9 percentage points to 58.2. A marginal rise by the services sub-index to 52.7 wasn’t enough to offset that, resulting in a dip of 0.4 percentage points for the headline figure.
In its note the bureau said services sector growth remained steady, noting the latest reading marked a new high for this year and the third month of acceleration. It blamed softening in the construction sector on hot weather and rainstorms’ impact, but suggested things would pick up as heat dissipated and a “powerful push” for infrastructure development helped steady the industry.
Westpac senior economist Elliot Clarke likewise viewed last month’s “marginally expansionary” readings on manufacturing as welcome, but noted conditions in the sector were still weak, and noted of services that it “is clear that the sector remains under stress”:
New business was 2.7ppts below its long-run average in August; but external demand did improve, export orders rising to be 1.9ppts below average versus July’s –3.2ppts. Job shedding also looks to be continuing in this sector. One positive for service producers is that pressure on final prices looks to have subsided. Having been 2.8ppts below its long-run average in January, the final prices index now sits broadly at its historic average. Meanwhile, input price pressures remain muted, with the index 4ppts below its 56.8 long-run average.
