Caixin China General Manufacturing PMI(May 2016)

Manufacturing PMI edges down to three-month low

Summary

The health of China’s manufacturing sector continued to decline in May, with output and new orders both falling slightly. At the same time, job shedding persisted across the sector, with the rate of reduction remaining close to February’s post-global financial crisis record. Weak demand conditions underpinned further falls in both purchasing activity and inventory holdings in May. Inflationary pressures appeared to cool slightly, however, with input prices and output charges both rising at weaker rates.

Adjusted for seasonal factors, the Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy – dipped to 49.2 in May, down from 49.4 in April, and below the neutral 50.0 value for the fifteenth successive month. That said, the PMI reading remained consistent with only a marginal deterioration in the health of the sector overall.

Weighing on the headline index was a renewed fall in total new business placed at Chinese manufacturers in May. Though fractional, it was the first reduction in new work for three months. According to panellists, poor market conditions had led to a drop in client demand in the latest survey period. New export orders also fell in May, with the latest reduction the quickest seen in three months and moderate overall.

Reflective of weak demand conditions, companies trimmed their production schedules fractionally for the second month in a row.

Payroll numbers at Chinese manufacturers continued their downward trend in May. Moreover, the rate of job shedding remained similar to February’s multi-year record and was solid. Panellists that noted lower staff numbers generally commented on efforts to raise efficiency through down-sizing policies and the non-replacement of voluntary leavers. At the same time, backlogs of work rose only slightly in May, as has been the case in each of the past three months.

Purchasing activity fell for the second successive month in May, though the rate of reduction eased since April and was marginal. Meanwhile, tighter inventory policies persisted in May, with a number of monitored firms commenting on weaker client demand and lower production schedules. Stocks of finished items fell at a much slower pace than in April, however, while inventories of inputs fell modestly.

Although purchasing activity fell, average suppliers’ delivery times continued to lengthen in May. Longer lead times were generally linked by respondents to stock shortages at suppliers.

May data signalled a third successive monthly increase in cost burdens. That said, the rate of inflation eased since April and was modest overall. Some panellists commented that higher raw material prices had raised total input costs. In line with the trend for cost burdens, average output charges increased at a modest pace in May, following a solid rise in the previous month.

Key Points

• Output declines fractionally

• Total new work falls for first time since February, as new export work contracts at faster pace

• Employment continues to fall markedly

Comment

Commenting on the China General Manufacturing PMI™ data, Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group said:

“The Caixin China General Manufacturing PMI for May came in at 49.2, down 0.2 from April’s reading, marking the second consecutive monthly decline. Readings for the output and new order categories fell again, but employment improved slightly. Overall, China’s economy has not been able to sustain the recovery it had in the first quarter and is in the process of bottoming out. The government still needs to make full use of proactive fiscal policy measures accompanied by a prudent monetary policy to prevent the economy from slowing further.”