China Manufacturing PMI: Small uptick in August

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China’s CFLP Manufacturing PMI for August increased slightly to 51.7 from 51.2 – the first increase in 4 months. The uptick was in line with my forecast based on the historical seasonal pattern. Although the PMI is still above the critical level of 50, indicating continued growth in the manufacturing sector, the growth is weak and sub-par to previous years, excluding 2008 and 2009 as a result of the debt and liquidity crisis.

Sources: CFLP; Li & Fung; Plexus Asset Management.

The increase in the overall PMI was mainly as a result of higher new orders and new export orders.

Sources: CFLP; Li & Fung; Plexus Asset Management.

Uncertainty regarding the domestic and global economy was evident in that both stocks of finished goods and major inputs declined despite higher new orders and new export orders.

Sources: CFLP; Li & Fung; Plexus Asset Management.

However, the closely watched ratio between the new orders PMI and stocks of finished goods PMI has risen from 1.02 to 1.13, indicating that stocks of finished goods have probably reached a bottom and that stocks could be replenished in the near future.

Sources: CFLP; Li & Fung; Plexus Asset Management.

The Baltic Dry Index leads the ratio of new orders to finished goods by approximately one month. The recent rise in the Index and metal prices could therefore imply that the Chinese may be back in the market to replenish stocks of major inputs. This is underscored by the Chinese Coastal Freight indices for metal ore, coal and oil that continued to rise last week.

Sources: CFLP; Li & Fung; Plexus Asset Management; I-Net.

Sources: CFLP; Li & Fung; Plexus Asset Management; I-Net.

I expect China’s manufacturing PMI to rebound strongly in the seasonally strong September. A level of 54 compared to 51.7 in August is not excluded but will still indicate sub-par growth in the manufacturing sector. I also expect the Baltic Dry Index and metal prices to hold up in September, but further weakness may be waiting in the final quarter of this year.

Sources: CFLP; Li & Fung; Plexus Asset Management; I-Net.

The slowdown in GDP growth is evident in the following chart where the manufacturing PMI is depicted against GDP growth on a year-ago basis. It is indicated that GDP growth in the second quarter of this year has slowed to between 10% and 11% compared to 11.9% in the first quarter. The slowdown has continued into the third quarter to between 9% and 10%.

Sources: CFLP; Li & Fung; Plexus Asset Management; I-Net.

Investment implications:

Positive:

  • Commodities
  • Emerging-market currencies and bonds
  • Global equities
  • Euro

Negative:

  • Mature-market bonds
  • Yen
  • Gold

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