China Manufacturing PMI: Outlook worsening

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The HSBC Flash China Manufacturing PMI for November dropped to a 32-month low of 48.0 from 51.0 in October. According to Markit, new orders are contracting while stocks of finished goods are contracting at a faster rate. It is evident that local demand is slowing as new export orders are expanding more quickly. Although the stocks of finished goods are contracting at a faster rate, stocks of purchases are expanding again despite a contraction in the quantity of purchases, indicating that Chinese manufacturers remain overstocked relative to demand.

Although the HSBC PMI sometimes differs significantly from the official CFLP PMI, both gauges indicate a significant slowdown in China’s manufacturing sector. The CFLP manufacturing PMI has continued to follow the below-par trend since February this year. Although the PMI is likely to tick up in November thanks to seasonal strength, I expect only a slight rise to approximately 51.3 from October’s 50.4.

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

On a seasonally adjusted basis I expect the CFLP manufacturing PMI to remain unchanged at 50.6.

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

The slowdown in domestic demand as indicated by the HSBC report does not auger well for China’s non-manufacturing sector. November is normally one of the weakest months of the year from a seasonal point of view. I would therefore not be surprised if the CFLP non-manufacturing PMI fell to 49.5 or below in November.

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

A fall to 49.5 will result in the PMI reaching the lowest level of 51.2 since February 2009 on a seasonally adjusted basis according to my calculations.

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

The expected manufacturing and non-manufacturing PMIs will confirm that China’s GDP growth is likely to slow to below 9% in the last quarter of this year.

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