Caixin China General Manufacturing PMI (July 2021)

Operating conditions improve only slightly in July

Key findings

• Output growth slows amid slight drop in new orders

• Staffing levels are broadly unchanged

• Inflationary pressures ease

Data were collected 12-22 July 2021

Manufacturers in China signalled a softer improvement in operating conditions at the start of the third quarter. Output expanded at the slowest rate for 16 months, while overall new work fell slightly for the first time since May 2020. The COVID-19 pandemic meanwhile continued to dampen export sales, which rose only slightly in July. Relatively subdued demand conditions resulted in broadly unchanged employment across the sector. At the same time, inflationary pressures eased, with both input costs and output charges increasing at softer rates.

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy – slipped from 51.3 in June to 50.3 in July, to point to a softer improvement in the health of the sector that was only slight. Notably, it signalled the slowest improvement for 15 months.

A key factor weighing on the headline reading was a renewed fall in total new business during July. Though only marginal, it marked the first decline in sales for 14 months. Some companies noted that higher factory gate prices had dampened customer demand. At the same time, new export orders rose only slightly as the pandemic continued to hinder sales overseas.

Concurrently, the rate of output growth softened for the third month in a row. The latest increase was the slowest seen for 16 months and only marginal. Where production had increased, it was generally linked to improved capacity and firmer market conditions.

In line with the trend for output, purchasing activity rose again in July, albeit only slightly. Notably, it was the softest increase in input buying for four months. Stocks of purchased items meanwhile declined slightly during the latest survey period. Panel members indicated that some firms increased their usage of current inventories due to rising raw material prices. Meanwhile, the delivery of goods to clients led to a further reduction in stocks of finished goods.

Supply chain delays persisted in July, with average delivery times for inputs increasing solidly. Anecdotal evidence indicated that material shortages and transport delays due to the pandemic had driven the latest increase in lead times.

Capacity pressures eased at the start of the third quarter, with backlogs of work rising at the softest pace for five months. Employment levels meanwhile were little-changed in July, after a slight uptick in payroll numbers in June.

The latest survey data also saw inflationary pressures soften. Input prices rose at the weakest rate since November 2020, albeit still sharply overall. Higher expenses were frequently linked to increased prices for a range of raw materials and greater transport fees. The rate of output charge inflation likewise slowed in July, with selling prices rising only slightly overall.

Chinese manufacturers were generally optimistic that output would increase over the next year. However, the level of confidence slipped to a three-month low amid concerns over how long it would take to get the global pandemic under control and ongoing supply chain disruption.

Comment

Commenting on the China General Manufacturing PMI data, Dr. Wang Zhe, Senior Economist at Caixin Insight Group said:

“The Caixin China General Manufacturing PMI came in at 50.3 in July, down from 51.3 the previous month. The July reading was the lowest in 15 months, though it marked the 15th consecutive month of expansion. That meant while the manufacturing industry continued to grow, the rate of expansion slowed further.

“Supply in the manufacturing sector continued to expand, while demand contracted for the first time in more than a year. External demand remained stable. The gauge for output in July was the lowest in 16 months, while the gauge for new orders was the lowest in 15 months. Surveyed manufacturing enterprises said market demand was weak. High product prices supressed demand, especially for consumer goods and intermediate goods. The gauge for new export orders came in just above 50 in July. The epidemic situation varied in different regions overseas, which made exports remain stable as a whole.

“The employment market stayed stable. Some enterprises hired more staff to expand production capacity, while some kept a cautious stance on increasing hiring. The measure for employment was just above 50 in July, marking the fourth straight month of expansion. Outstanding workloads increased slightly.

“Inflationary pressure eased slightly. Both the gauges for input prices and output prices fell in July, with the latter dropping at a steeper pace. Still, the gauge for input prices was well above 50, as surveyed enterprises said raw material prices remained high, especially for industrial metals. Notably, the gauge for input prices remained above 55 for the eighth consecutive month in July. By comparison, the gauge for output prices was just above 50 in July, the lowest since September. As mentioned earlier, market demand was sensitive to product prices, which limited enterprises’ pricing power.

“Logistics delivery times continued to lengthen. Impacted by the resurgence of the Covid epidemic in some regions in China and the shortage of materials including chips, the measure for suppliers’ delivery times remained in contractionary territory. Prices of raw materials remained high. Manufacturing enterprises’ quantity of purchases increased marginally, while the stock of purchases fell slightly.

“Overall, the rate of expansion in the manufacturing sector slowed in July. Market supply continued to expand, while demand began to come under pressure. The job market remained stable, as did the quantity and stock of purchases. Enterprises were cautious about increasing staff and purchasing raw materials. Inflationary pressure was partly eased, but input prices and output prices of manufacturing enterprises continued to rise, especially raw materials such as industrial metals. Entrepreneurs stayed positive about the business outlook, but the measure for future output expectations in July was lower than its long-term average and was the lowest in 15 months. China’s official second-quarter economic figures were in line with expectations, but the Caixin China manufacturing PMI in July and relevant data suggested the recovery of the economy is not yet solid. The economy is still facing huge downward pressure, and we need to ensure entrepreneurs’ confidence.”

Contact

Dr. Wang Zhe

Senior Economist

Caixin Insight Group

+86-10-8590-5019

zhewang@caixin.com

Ma Ling

Senior Director

Brand and Communications

Caixin Insight Group

T: +86-10-8590-5204

lingma@caixin.com

Annabel Fiddes

Associate Director

IHS Markit

T: +44 1491 461 010

annabel.fiddes@ihsmarkit.com

Joanna Vickers

Corporate Communications

IHS Markit

T: +44 207 260 2234

joanna.vickers@ihsmarkit.com

About Caixin

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