Economic Highlights (China) - 01/04/2014

China: Official Manufacturing PMI Rose to 50.3 in March

• China’s official manufacturing PMI improved marginally in Mar, rising from 50.2 in Feb to 50.3 (OSK-DMG: 50.4, consensus: 50.1), and indicating slightly stronger manufacturing activity after three consecutive months of moderation. This contrasts with the final reading of the HSBC China manufacturing PMI, which declined from 48.5 in Feb to 48.0 in Mar, signalling a further deterioration in the Chinese manufacturing operating conditions for the third month running.

• Details of the official index show that the latest increase was led by the imports and new export orders components, which suggest an improvement in the external sector while domestic demand conditions were relatively stable. The imports index rose 2.6-pts MoM to 49.1 in Mar, while new export orders (+1.9 pt MoM) rose above 50, at 50.1 after three successive months in contraction territory. By contrast, new orders and output increased only slightly, with both indices up 0.1-pt MoM to 50.6 and 52.7, respectively, which were significantly lower than the average increases of 3.7-pts and 4.7-pts seen for Mar in 2005-2013. Meanwhile, sentiment among manufacturers improved further, with the business expectations sub-index (+0.9 pt MoM) reaching a 12-month high at 62.7, and represents the third successive month of uplift in business confidence.

• In line with the increased optimism and improving external demand, purchasing activity returned to expansion after having contracted in the prior month as the purchases of inputs index rose from 49.4 in Feb to 50.3 in Mar. The stocks of major inputs index also increased from 47.4 in Feb to 47.8 during Mar, consistent with the higher quantity of purchases and expectations of increased demand in the coming months. On the other hand, the employment sub-index rose for the first time in four months, up from 48.0 in Feb to 48.3, suggesting fewer job losses as external demand improved. Input cost inflation meanwhile decelerated sharply in Mar, with the input prices sub-index (-3.3 pt MoM) reaching the lowest level in eleven months at 44.4, partly due to lower prices of commodities and raw materials. At this juncture, the inflation outlook remains benign given relatively muted imported inflation and excess industrial capacity at home.

• Overall, Mar official PMI indicated a marginal upturn in the Chinese manufacturing sector, following disruptions in activity in Jan-Feb caused by the Lunar New Year holidays. The latest data offered signs that growth in domestic demand is still slow, while external demand might have started to improve, with new export orders rising again after declines in the past three months, albeit only slightly. These imply that GDP growth is likely to have slowed further in the first quarter, while exports may pick up towards the end of the first half, although a notable rise in foreign demand remains uncertain until we see a more sustainable and faster growth in orders from overseas. That said, we believe the economy is likely to stabilize and regain momentum in 2q as the government speeds up investment projects and other measures to support domestic demand and growth.

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