China Manufacturing PMI: Somewhat Stronger Than Anticipated
The CFLP China Manufacturing PMI for November rose for the fourth consecutive month, to 55.2 compared to October's 54.7.
Sources: Li & Fung; Plexus Asset Management.
The number was roughly in line with the seasonal trend as depicted by the averages of the period 2005 to 2007 but was slightly higher than I expected.
Sources: Li & Fung; Plexus Asset Management.
The higher PMI was mainly driven by higher new export orders that rebounded to a six-month high. However, the imports PMI weakened substantially and at 50.6 is on the brink of contraction. The input prices index jumped to 73.5 from 69.9 in October, with significant cost pressures in commodities such as chemical fibres, rubber and plastics, chemicals, energy and the smelting of non-ferrous metals.
| China Manufacturing PMI November 2010 |
Seasonally adjusted index |
Compared to previous month |
Direction |
| PMI | 55.2 | Higher | Expanding |
| Output | 58.5 | Higher | Expanding |
| New Orders | 58.3 | Higher | Expanding |
| New Export Orders | 53.2 | Higher | Expanding |
| Backlogs of Orders | 50.5 | Higher | Expanding |
| Stocks of Finished Goods | 47.7 | Higher | Contracting |
| Purchases of Inputs | 57.4 | Lower | Expanding |
| Imports | 50.6 | Lower | Expanding |
| Input Prices | 73.5 | Higher | Expanding |
| Stocks of Major Inputs | 49.7 | Higher | Contracting |
| Employment | 52.0 | Lower | Expanding |
| Suppliers' Delivery Time | 48.9 | Lower | Quickening |
The acceleration of the expansion of China's manufacturing sector, as well as continuing higher input prices, therefore justifies the PBoC's tightening of credit conditions via higher interest rates and increasing the reserve requirements of banks in recent months. Year-on-year GDP growth in the current quarter has probably accelerated closer to 10%.
Sources: Li & Fung; I-Net Bridge; Plexus Asset Management.
Will the PBoC take further action in light of the strong manufacturing number? Maybe, but I think it will first adopt a wait-and-see stance to ascertain the effects of its latest actions. The fact that the import side has slumped indicates to me that growth in domestic demand may be leveling off. Furthermore, the slump in bulk freight rates as measured by the Baltic Dry Index and the Chinese Bulk Freight Index together with a steep decline in containerized freight rate indices may indicate that inventories in the manufacturing sector may be too high given the level of orders and on an absolute basis.
Sources: Li & Fung; I-Net Bridge; Plexus Asset Management.
Sources: Li & Fung; I-Net Bridge; Plexus Asset Management.
The global bond players think China's manufacturing PMI will remain elevated, though. The JP Morgan Emerging Markets Bond yield spread to U.S. treasuries has been a remarkable leading indicator of China's manufacturing PMI, especially over the past year. (Please note that the PMI is in reverse order.)
Sources: Li & Fung; I-Net Bridge; Plexus Asset Management.
Leading by one month the current yield spread of 248 basis points indicates that December's manufacturing PMI will come in virtually unchanged from November's.
Sources: Li & Fung; I-Net Bridge; Plexus Asset Management.
Looking at the trend from 2005 to 2007 it seems as if December could be a slightly weaker month from a seasonal point of view. The bond market players may therefore be correct, but such a continued relatively strong number may in fact force the PBoC's hand for further tightening.
The key to it all may in fact be China's non-manufacturing PMI for November, which will be published within the next few days. If the seasonal pattern of the past two years holds true, I expect a significant slump in the number. Will that affect the PBoC's monetary stance?
The elevated China manufacturing PMI of new export orders indicates to me that my GDP-weighted ISM PMI for U.S. manufacturing and non-manufacturing imports (to be published during the next few days) is likely to indicate acceleration in growth in imports.
My GDP-weighted ISM PMI for exports may come in slightly lower, though.
Sources: Li & Fung; ISM; Plexus Asset Management.
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Author: Prieur du Plessis
Dr Prieur du Plessis
investmentpostcards.com
With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.
He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).
Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.
Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.
Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.
In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).
Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.
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