China: HSBC PMI Suggests Recovery Gaining Strength‏

China's HSBC manufacturing PMI improved to 50.4 in November from 49.5 in October. The details were mixed, with total new orders declining slightly albeit staying above the critical 50 mark. However, export orders improved markedly and, in line with China's recent foreign trade data, suggest surprisingly resilient exports. Inventory cuts are easing and Chinese companies have increased their purchase of inputs, suggesting China's import growth is poised to pick up.

The continued improvement in the manufacturing PMI is consistent with our view that the Chinese economy has bottomed out and has started to recover moderately. Policy wise, the implication is that we are unlikely to see further substantial monetary and fiscal easing.

Details
The flash estimate for China HSBC manufacturing PMI in November improved to 50.4 (DBM: 50.2) from a final reading of 49.5 in October. This is the third month in a row with an improvement in HSBC manufacturing and it is now at its highest level since October last year.

The details were mixed, with new orders declining from 51.2 to 50.1 while export orders improved markedly from 46.7 to 52.4. For export orders, this is the highest level since October 2010 and, in line with the recent foreign trade data, suggests surprisingly resilient exports that are poised to add to growth in the quarter.

The HSBC PMI also suggests that inventory cuts are coming to an end. The finished goods inventory component improved slightly from 48.4 to 49.5 and the purchased input inventory component also improved from 48.2 to 50.9. Importantly, Chinese companies picked up their purchase of inputs substantially with the sub-component for purchased inputs improving from 50.1 to 52.4. The purchased input component has been a good predictor for China’s import growth (see charts on next page) so it does indicate that China’s import growth is poised to pick up in the coming months.

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