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China Manufacturing PMI: Somewhat Stronger Than Anticipated

The CFLP China Manufacturing PMI for November rose for the fourth consecutive month, to 55.2 compared to October's 54.7.

China Manufactuing PMI
Sources: Li & Fung; Plexus Asset Management.

The number was roughly in line with the seasonal trend as depicted by the averages of the period 2005 to 2007 but was slightly higher than I expected.

Manufacturing PMI 2005-2007 and 2010
Sources: Li & Fung; Plexus Asset Management.

The higher PMI was mainly driven by higher new export orders that rebounded to a six-month high. However, the imports PMI weakened substantially and at 50.6 is on the brink of contraction. The input prices index jumped to 73.5 from 69.9 in October, with significant cost pressures in commodities such as chemical fibres, rubber and plastics, chemicals, energy and the smelting of non-ferrous metals.

China Manufacturing PMI
 November 2010
 adjusted index
Compared to
 previous month
PMI 55.2 Higher Expanding
Output 58.5 Higher Expanding
New Orders 58.3 Higher Expanding
New Export Orders 53.2 Higher Expanding
Backlogs of Orders 50.5 Higher Expanding
Stocks of Finished Goods 47.7 Higher Contracting
Purchases of Inputs 57.4 Lower Expanding
Imports 50.6 Lower Expanding
Input Prices 73.5 Higher Expanding
Stocks of Major Inputs 49.7 Higher Contracting
Employment 52.0 Lower Expanding
Suppliers' Delivery Time 48.9 Lower Quickening
Source: Li & Fung

The acceleration of the expansion of China's manufacturing sector, as well as continuing higher input prices, therefore justifies the PBoC's tightening of credit conditions via higher interest rates and increasing the reserve requirements of banks in recent months. Year-on-year GDP growth in the current quarter has probably accelerated closer to 10%.

China Real GDP Growth YOY%
Sources: Li & Fung; I-Net Bridge; Plexus Asset Management.

Will the PBoC take further action in light of the strong manufacturing number? Maybe, but I think it will first adopt a wait-and-see stance to ascertain the effects of its latest actions. The fact that the import side has slumped indicates to me that growth in domestic demand may be leveling off. Furthermore, the slump in bulk freight rates as measured by the Baltic Dry Index and the Chinese Bulk Freight Index together with a steep decline in containerized freight rate indices may indicate that inventories in the manufacturing sector may be too high given the level of orders and on an absolute basis.

Baltic Dry Index
Sources: Li & Fung; I-Net Bridge; Plexus Asset Management.

Baltic Dry versus China Manufacturing PMI
Sources: Li & Fung; I-Net Bridge; Plexus Asset Management.

The global bond players think China's manufacturing PMI will remain elevated, though. The JP Morgan Emerging Markets Bond yield spread to U.S. treasuries has been a remarkable leading indicator of China's manufacturing PMI, especially over the past year. (Please note that the PMI is in reverse order.)

JP Morgn Emerging Bond market
Sources: Li & Fung; I-Net Bridge; Plexus Asset Management.

Leading by one month the current yield spread of 248 basis points indicates that December's manufacturing PMI will come in virtually unchanged from November's.

JP Morgan Emerging Market Bond Yield Spread to Treasuries
Sources: Li & Fung; I-Net Bridge; Plexus Asset Management.

Looking at the trend from 2005 to 2007 it seems as if December could be a slightly weaker month from a seasonal point of view. The bond market players may therefore be correct, but such a continued relatively strong number may in fact force the PBoC's hand for further tightening.

The key to it all may in fact be China's non-manufacturing PMI for November, which will be published within the next few days. If the seasonal pattern of the past two years holds true, I expect a significant slump in the number. Will that affect the PBoC's monetary stance?

The elevated China manufacturing PMI of new export orders indicates to me that my GDP-weighted ISM PMI for U.S. manufacturing and non-manufacturing imports (to be published during the next few days) is likely to indicate acceleration in growth in imports.

My GDP-weighted ISM PMI for exports may come in slightly lower, though.

US GDP-Weighted PMI Exports
Sources: Li & Fung; ISM; Plexus Asset Management.


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