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Caixin China PMI points to stable manufacturing conditions, but outlook remains dim
01 April 2020Bernard Aw
Caixin China Manufacturing PMI rebounds nearly 10 points to
50.1 in March, up from the record low of 40.3 in February
Output showed modest return to growth as an increasing number
of industrial firms resume work
Demand conditions continue to weaken
Input and output prices fall
Manufacturing conditions across mainland China stabilised in
March, according to the latest Caixin PMI data. The survey showed a
slight increase in production after a record decline in February
due to factory shutdowns and travel restrictions. However, a
sustained fall in new business inflows suggests that further growth
in output could be limited in the coming months, and largely
confined to processing backlogs, as the coronavirus disease 2019
(COVID-19) pandemic hits worldwide demand.
Production restarts
The headline Caixin China General Manufacturing
PMI rose to 50.1 in March, up sharply from 40.3 in
February, representing the largest monthly increase in the 16-year
survey history. However, some caution needs to be applied in
interpreting the PMI. The PMI measures the month-on-month change in
business conditions, with a level of 50.0 representing the no
change mark. The headline index therefore merely pointed to a
stabilisation of operating conditions in the sector during March
rather than a recovery. Coming on the heels of an unprecedented
collapse in February, the marginal gain seen in March leaves the
level of business activity remaining well below that seen in
January.
Driving the headline index higher was the resumption of output
growth, albeit only modest. Having plummeted in February,
manufacturing production rose slightly in March as fewer companies
reported factory closures and more manufacturers reportedly
restarted work throughout the month. That said, the rate of growth
in overall output was marginal, reflecting the fact that operating
capacity has yet to return to full strength in many sectors.
The recovery in output was led by large- and medium-sized
manufacturers, but production of small firms fell further (though
at a considerably slower rate than in February).
Firms optimistic that demand will revive
Business confidence remained among the highest for the past five
years, as reflected by the Future Output Index, with the proportion
of firms expecting higher output in a year's time exceeding those
anticipating a decline. Optimists generally highlighted work
resumptions as a key reason for higher confidence.
As such, firms are likely to be relying heavily on processing
orders not yet fulfilled due to factory shutdowns and supply chains
disruptions, plus capacity coming back on-line in the coming months
as demand conditions continued to weaken in March.
Total new orders shrank for a second straight month at the end
of the first quarter, albeit at a much slower pace compared to
February. New export orders showed a similar trend. The
increasingly strict measures to contain the COVID-19 virus around
the world, such as more countries implementing lockdowns and travel
restrictions, have hit global demand.
Job shedding persisted in March, with firms cutting their
workforce numbers for a third straight month. Panel comments
highlighted layoffs and efforts to improve productivity as reasons
for lower factory employment.
Supply chains still under pressure
The gradual restoration of supply chains meanwhile led to an
increased availability of input materials. This was reflected by a
modest rise in purchasing activity.
Responses nevertheless continued to indicate that the COVID-19
outbreak adversely impact supply chains. While not as severe
compared to February, delivery times continued to lengthen at a
rate not usually seen since the global financial crisis. Anecdotal
evidence suggested that delivery delays were linked to distributors
not yet resuming to full capacity as well as an understaffed
workforce.
Prices fall
Chinese manufacturers reported a decline in input costs for the
first time in seven months during March, as falling global prices
for raw materials (such as base metals) and energy (particularly
oil and coal) helped drive input prices lower. At the same time,
prices charged for manufactured goods were reduced further in
March, falling at the fastest rate for seven months. Firms
generally commented on efforts to boost sales via price
discounting.
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
