Nov’s PMI Shows China’s Economic Rebound May Be Fading

The author is Capital Economics’ China economist Qinwei Wang

China’s flash HSBC PMI fell from 50.9 in October to 50.4 this month. This was at the low end of the range of the Bloomberg survey median of 50.8 and our forecast of 50.9.

he flash estimate is typically based on 85-90% of survey responses, with an average
absolute difference between flash and final readings of 0.2 points over the past 12
months, though it is worth noting that the difference was 1.0 points in September.

The fall in the headline PMI, the first since July, suggests that momentum in
manufacturing is cooling.

The breakdown shows only a few bright spots. The output component rose from
October’s 51.1 to 51.3, which is an eight-month high. The component covering
finished goods inventories fell slightly from 50.2 to 49.8, implying that firms are
reducing their stocks of unsold goods again.

However, all other activity components show signs of deterioration. The component
measuring firms’ backlog of work fell; delivery time shortened. Both suggest that
demand is softening, making it easier for firms to fill orders.

Indeed, the more forward-looking component for new orders fell (from 51.5 to 51.0)
for the first time since the summer. Much of the weakness appears to have come from
foreign demand – new export orders fell from 51.3 to 49.4.

This suggests that the state of overseas demand is more fragile than many think.

Meanwhile, the employment component dropped back to 49.5 from 50.4. That said,
we are not concerned about the current health of the labour market, as this component had been below 50 for six consecutive months before October despite strong migrant wage growth and other evidence that the labour market was actually tight.

Finally, both input and output price components fell, consistent with the view that
price pressures in general remain subdued.

The upshot is that today’s weaker-than-expected data signal that activity in
manufacturing is losing some strength. Industry had been the key driver of the rebound during the summer.

Our broader China Activity Proxy (CAP) suggests that the pick-up in
growth in this area has not spread more widely. In other words, any slowdown in industry would very likely mean that the wider economic rebound had run its course.

(The article has been edited for clarity)

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