HSBC PMI Declines, But It’s Too Early to Determine a Peak

The flash estimate for the HSBC manufacturing PMI fell to 50.4 in November, down from a final reading of 50.9 in October and below the consensus of 50.8 and DBM’s prediction of 51.2. The details indicate some weaknesses, particularly in external demand, with new orders slipping to 51.0 from 51.5 and export orders significantly declining to 49.4 from 51.3 in October. On a brighter note, Chinese companies have resumed inventory reductions, with finished goods inventory decreasing to 49.8 from 50.2 and the stocks of inputs falling to 49.0 from 50.1 in October. Despite the decline in new orders, the new order-inventory balance remains relatively healthy.

The output price component also decreased to 49.8 in November, down from 50.4 in October, indicating that there is no severe inflationary pressure at this moment. Consumer price inflation has risen to over 3% year-on-year recently, becoming a growing concern, though this increase has been largely attributed to higher food prices. There is hope that inflation will ease somewhat in the coming months.

Is it too soon to declare that Chinese manufacturing PMIs have peaked? While it may still be early to confirm a peak, the current forward-looking indicators are mixed. The leading indicator for China suggests a moderate improvement in manufacturing PMIs, and the new order-inventory balance remains in relatively good shape. The current weakness appears largely driven by external demand. We still anticipate that external demand will provide a slight boost to China next year, although some uncertainties persist in emerging markets. Financial indicators such as monetary supply and credit growth suggest that China’s growth could begin to pick up soon, with these indicators typically signaling a peak early next year rather than late in 2013.

We expect manufacturing PMIs to show slight improvements in the coming months, with an anticipated peak around 52 for the HSBC manufacturing PMI early in the first quarter of 2014. However, the current PMI readings indicate some downside risks. We continue to project GDP growth to increase slightly to 7.8% year-on-year in the fourth quarter, up from 7.7% year-on-year in the third quarter.