China’s small factory activity expanded in November at fastest pace in nearly three years

Karen Yeung

Manufacturing activity in China’s small factories expanded for the fourth month in a row in November to the highest level in nearly three years, a private survey released on Monday showed, providing evidence that the economy may be heading for some stabilisation in the near term after weakening for most of the year.

The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) edged up to 51.8 in November from 51.7 in October. The latest reading confounded expectations for a small decline to 51.5 in a Bloomberg survey of analysts forecasts. It is the fastest expansion since reaching 51.9 in December 2016.

The results of the Caixin PMI survey, which mainly tracks smaller private-sector factories, followed the stronger-than-expected reading in the official manufacturing PMI data, that mainly focuses on larger manufacturers. The official survey unexpectedly returned to expansionary territory in November for the first time in seven months, according to government data released on Saturday.

The latest upturn in the health of the sector was partly supported by a further rise in new business placed with Chinese manufacturers

Caixin

With both Caixin and official PMI data showing a reading above 50 – indicating expansion in sector activity – China’s manufacturing sector and economy may be finally showing signs of stabilisation.

“The latest upturn in the health of the sector was partly supported by a further rise in new business placed with Chinese manufacturers,” Caixin said in a statement. “A number of firms citing firmer underlying demand conditions. Demand from overseas also improved, with export sales picking up for the second month in a row.

“New business rose strongly, which underpinned a further solid increase in production. Notably, new export orders saw the first back-to-back monthly rise for over a year-and-a-half.”

If trade negotiations between China and the US can progress in the next phase and business confidence can be repaired effectively, manufacturing production and investment is likely to see a solid improvement

Zhengsheng Zhong

Zhengsheng Zhong, director of Macroeconomic Analysis at CEBM Group, which works with Caixin on the report, warned that business confidence remained subdued, as firms’ concerns about government policies and their willingness to replenish stocks remained limited.

“Currently, manufacturing investment may be lingering near a recent bottom. If trade negotiations between China and the US can progress in the next phase and business confidence can be repaired effectively, manufacturing production and investment is likely to see a solid improvement,” Zhong said.

Betty Wang, senior China economist at ANZ Bank said before the release of the PMI data, that holiday demand which contributed to the higher headline PMI figure masked deflationary risks in the sector.

Although we remain sceptical that activity is nearly as strong as the Caixin PMI implies, the synchronised improvement in the survey data does point toward some uptick in growth last month

Julian Evans-Pritchard

Lower input and output price indices suggest deflationary risks in the manufacturing sector remain a concern.

“Admittedly, the recent strength of the Caixin index has been difficult to square with the hard data, which continued to weaken in October. And metals prices point to more subdued activity last month. That said, unlike in October, the official manufacturing PMI also rose last month, from 49.3 to 50.2. And the official non-manufacturing PMI jumped from an eight-month low to an eight-month high,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

“Although we remain sceptical that activity is nearly as strong as the Caixin PMI implies, the synchronised improvement in the survey data does point toward some uptick in growth last month. That said, with credit growth slowing and property construction still expanding at an unsustainable rate, we doubt this signals the bottom of the current economic cycle.”

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