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China's PMI - A Key Indicator

Both of China's two Purchasing Managers Indices (PMIs), an indication of manufacturing activity, have risen above the 50 threshold which indicates expansion of the sector. Manufacturing accounts for 40% of China's GDP and was in contraction as external demand for Chinese goods fell and domestic demand softened. A separate PMI released by the CLSA rose to 51.8 in June from 51.2 in May, its third month above 50.

Seasonality of the indices: April was the peak month in 2006-08, increasing around 1.2pts in the month. In each of the past four years, May-July had sequential declines. The April 2009 gains were again concentrated in investment related industries, necessary at this stage of the recovery, but leaving concerns about private sector revival. Breakdown of the June numbers: 14 out of 20 industries had above 50 PMIs with Smelting of ferrous metals the highest (60.3%).Chemicals was the lowest (44.4%). Stocks of finished goods have fallen. 5 of the 20 industries surveyed reported increases in employment whilst 15 industries registered decreases in employment. Seasonally adjusted, the PMI rose from 52.7 to 53.7, a peak since April 2008, matching with anecdotal evidence for electricity production and cargo traffic. continued contraction (for the 14th month) of the inventory index and employment sugests "that firms are no longer have significant downsize pressure, but are not in a position to expand".

Despite a weaker than expected improvement in the two manufacturing PMIs, the momentum in industrial production should be maintained in June suggesting a growth rate of 7.5% y/y in Q2 2009. Growth in electricity production will support this trend. Exports could remain sluggish before the G3 economies recover. Similar to March, the machinery and equipment sector led the production expansion. Production index for non-ferrous metals was above 50 as the industry benefited from the government accumulating inventory but, without a solid improvement in end-user demand, excess capacity could rise.

p/s photos: Maggie Cheung Ho Yee


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