China’s December 2010 PMIs: Signaling a slowdown?

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China’s manufacturing PMI fell to 53.9 in December from 55.2 in the previous month, according to the China Federation of Logistics and Purchasing (CFLP). The decline can largely be ascribed to a moderation in the output index to 57.5 from 58.5 in November and a drop in the new orders index to 55.4 from 58.3. The trend is echoed by Markit’s release of the HSBC Purchasing Managers Index for China for December that saw the index falling to a three-month low of 54.4 in December from 55.3 in November.

Although input prices rose significantly in December with the input price index at 66.7, the rate of input cost inflation moderated markedly from November’s reading of 73.5

In contrast to new orders the New Export Orders Index came in higher at 53.5 in December compared to November’s 53.2 – an indication that domestic demand eased substantially. Another indication of slower domestic demand is that manufactured imports are barely growing, with the imports index softening to 50.4 compared to 50.6 in November.

Contrary to what many commentators are suggesting, I am not convinced that the drop is entirely be due to the fact that the monetary tightening measures introduced by the PBoC in recent months have started to impact negatively on the economy. Based on seasonal factors, I expected the manufacturing PMI to come in somewhat lower in December.

Yes, you may ask, what about the PMIs for January and February from a seasonal point of view as what happened in January and February 2010 was contra to the average from 2005 to 2007.

My analysis indicates that the timing of the Chinese Spring Festival which includes the Chinese New Year with the so-called Golden Week (official holidays) has a major bearing on the Manufacturing PMI for that month. Please bear in mind that the planning for the festivities are preceded by preparations and the festivities last 15 days in total. In 2006 when the Golden Week was at the end of January, January’s PMI came in virtually flat from the previous month (December 2005) and shot up in February. When the Golden Week was in the second half of February in 2007 the PMI dropped significantly from the previous month (January 2007) and rose substantially in March that year. With the Golden Week at the beginning of February in 2008 the PMIs for January and February were pretty weak and rebounded strongly in March. In 2010 the Golden Week was around the middle of February and the PMI for February dropped sharply from January’s number but rebounded strongly thereafter. The 2009 year was omitted due to China’s economy recovering from the 2008/2009 recession.

It seems to me that this type of business behavior or seasonality is likely to remain for the distant future. With the Golden Week of 2011 scheduled for February 2 – 8, I am unsure as to how the PMI will be influenced. My gut feeling is that either January will be weak as in 2006 when the Golden Week started 4 days earlier than scheduled for 2011, or both January and February will be weak as in 2008 when the Golden Week started 4 days later than that scheduled for this year.

Be that as it may, there is some bad news ahead if the market interprets this in a wrong way!

China’s non-manufacturing PMI for December 2010 was released yesterday morning. The PMI rebounded strongly to 56.5 from November’s 53.2. This is in line what I expected. The outlook for January is for a steady PMI but a potential significant drop in February.

Beware of seasonality!

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