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Manufacturing remains weak on inventory destocking
By Ma Jun |
July 6, 2012, Friday
|
Print Edition
Print Edition
THE official manufacturing Purchasing Managers' Index in China declined a bit further to 50.2 in June from 50.4 in May on seasonal factors as well as continued inventory destocking.
Historically, the official PMI in June was on average 1 percentage point lower than that in May due to seasonality, suggesting that the underlying PMI trend may be slightly improved.
However, the HSBC PMI, which does a better job on seasonal adjustment, showed that it still declined by 0.2 point to 48.2 in June this year.
In addition, our recent surveys with nearly 100 enterprises in Shanghai and Guangdong Province also indicate that there has not been a visible improvement in the operating environment in the coastal areas.
While our growth forecast remains that the third quarter will likely see some sequential recovery on policy easing, we feel that the improvement in July will likely be modest due to the continuation of inventory destocking.
Within the June PMI report, the sub-indices showed further declines in new orders, export orders, and input prices. The new export orders sub-index fell 2.9 points to 47.5 while those for quantity of purchases (-3.9 points) and input prices (-3.6 points) also dropped visibly.
Given the further decline in raw material prices, it is obvious that inventory destocking remains a key main reason for demand contraction in the heavy manufacturing sector. Although the sub-index for raw material inventory rose a bit to 48, it was still below the break-even level.
By product category, the PMIs for consumer sectors such as food and beverage, tobacco, furniture and garment were above 50, while the average of raw materials and energies (such as cement, steel, chemical, oil, coal and textile) stood at around 45.
Overall, the weak PMIs (both official and HSBC) in June support our view that industrial production growth in June may be close to the worst in the year, and quarter-on quarter seasonally adjusted annual rate of GDP growth may come in at only 6.2 percent in the second quarter (vs. 7.4 percent in the first quarter).
Policy developments continue to point to a sequential recovery in GDP growth in the third quarter (to around 8.5 percent quarter on quarter and 7.9 percent year on year in our view): bank lending recovered in May and may rise further to 900 billion yuan (US$143 billion) or above in June; project approvals and budgetary allocation to new infrastructure projects accelerated in the past two months; the Ministry of Railway has accelerated its pace of project implementation and second-half investment in railway projects may double that in the first half. In addition, we expect another cut on the reserve requirement ratio in the coming 1-2 weeks.
However, it will likely take a little while before these growth-boosting measures can offset the negative effect of inventory destocking. On balance, we expect a stabilization of industrial production growth in July and some visible improvement in industrial production growth from August or September.
Historically, the official PMI in June was on average 1 percentage point lower than that in May due to seasonality, suggesting that the underlying PMI trend may be slightly improved.
However, the HSBC PMI, which does a better job on seasonal adjustment, showed that it still declined by 0.2 point to 48.2 in June this year.
In addition, our recent surveys with nearly 100 enterprises in Shanghai and Guangdong Province also indicate that there has not been a visible improvement in the operating environment in the coastal areas.
While our growth forecast remains that the third quarter will likely see some sequential recovery on policy easing, we feel that the improvement in July will likely be modest due to the continuation of inventory destocking.
Within the June PMI report, the sub-indices showed further declines in new orders, export orders, and input prices. The new export orders sub-index fell 2.9 points to 47.5 while those for quantity of purchases (-3.9 points) and input prices (-3.6 points) also dropped visibly.
Given the further decline in raw material prices, it is obvious that inventory destocking remains a key main reason for demand contraction in the heavy manufacturing sector. Although the sub-index for raw material inventory rose a bit to 48, it was still below the break-even level.
By product category, the PMIs for consumer sectors such as food and beverage, tobacco, furniture and garment were above 50, while the average of raw materials and energies (such as cement, steel, chemical, oil, coal and textile) stood at around 45.
Overall, the weak PMIs (both official and HSBC) in June support our view that industrial production growth in June may be close to the worst in the year, and quarter-on quarter seasonally adjusted annual rate of GDP growth may come in at only 6.2 percent in the second quarter (vs. 7.4 percent in the first quarter).
Policy developments continue to point to a sequential recovery in GDP growth in the third quarter (to around 8.5 percent quarter on quarter and 7.9 percent year on year in our view): bank lending recovered in May and may rise further to 900 billion yuan (US$143 billion) or above in June; project approvals and budgetary allocation to new infrastructure projects accelerated in the past two months; the Ministry of Railway has accelerated its pace of project implementation and second-half investment in railway projects may double that in the first half. In addition, we expect another cut on the reserve requirement ratio in the coming 1-2 weeks.
However, it will likely take a little while before these growth-boosting measures can offset the negative effect of inventory destocking. On balance, we expect a stabilization of industrial production growth in July and some visible improvement in industrial production growth from August or September.
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