“One-to-watch-out-for”: China Manufacturing PMI

Overview

China is firmly back on the growth trend with PMI indices at pre-crisis level showing sustained growth in the manufacturing sector

China is firmly back on the growth trend with PMI indices at pre-crisis level showing sustained growth in the manufacturing sector. The Chinese economy has fired on all cylinders, fuelled by public stimulus, since mid-2008 to maintain GDP growth above the threshold of 8%. Shipping has benefitted from this.

A China Manufacturing purchasing managers’ index (PMI) released on 6 May by HSBC and Markit Economics fell to 55.4 in April, from 57.0 in March. Mean¬while a government PMI released 1 May showed an increase to 55.7, from 55.1, indicating that manufacturing grew at a faster pace as compared to the month before. A PMI-reading above 50 indicates growth. This is not the first time that the two PMIs have indicated opposite directions for the Chinese economy. This feature takes you behind the two PMIs and gives reasoning why China Manufacturing PMI is “one-to-watch-out-for” from a shipping industry perspective.

 

Source: BIMCO, CFLP, HSBC/Markit

According to HSBC/Markit, Chinese manufacturing grew at a slower pace in April as compared to March, indicating that Beijing’s policy tightening is starting to cool the overheated economy, which will help to contain inflationary risk in the coming quarters. A moderate slowdown in China’s factories could alleviate inflation pressures, and may affect the government’s decision whether to end the Yuan’s peg to the dollar. Normally a slowdown is bad news, but in this case it is actually good news for the overall economy, given that the index stays above 50.

As can be seen from the graph, the PMIs provide for a fairly good leading indicator to future official economic data releases such as GDP and industrial production.

The economy expanded 11.9 % in the first quarter, the fastest pace in two years. According to IMF, China’s economy may expand 10% this year and 9.9% in 2011.

To prevent the rapid growth from overheating the economy, the central bank is likely to keep racketing up reserve requirements and make upward adjustment to the interest rate in order to anchor inflation expectations.

Still, at the beginning of May, the central bank reaffirmed a “moderately loose” monetary policy, adding that the world’s recovery remains on a “fragile” foundation. Adding to that, the China Banking Regulatory Commission stated that China faces a complex economic environment this year amid weak global recovery and domestic problems including difficulty in managing inflation expectations, risks in local government borrowing and property loans. The sub-index of the HSCB PMI on new exports orders emphasise this with a significant drop.

Why is this interesting to follow from a shipping point of view?

Because shipping is providing the input of raw materials, energy and semi-finished goods to the manufacturing sector, and when the goods are manufactured the shipping industry then transports the products to the different costumers in the market all over the world. The fortunes of the dry bulk markets are basically down to the fortunes of China and the strong focus on heavy industrial development and con¬struction related to infrastructure and housing markets. Crude oil tankers are enjoying increasing demand from China to fuel the growth as the country’s energy demand develops from coal into oil. Last but not least, the container shipping industry relies heavily on Chinese exports of manufactured goods.

 

Economic development

As an indicator of growth in the secondary sector (manufacturing), a sustained PMI above 50 is good for the economy and good for shipping. In China, the secondary sector is gaining importance as the economy develops. In 1990 41% of GDP originated from manufacturing; in 2010 that figure is up close to 50%. Meanwhile, the primary sector has gone down from 27% to below 10%, leaving the tertiary (service) sector growing in importance from 32% to above 40%. This is a normal developing path for the economic transition of a maturing economy. However, the speed is extraordinary. China being the world manufacturing power-house gives extra importance to the manufacturing PMI as a leading indicator.

Manufacturing is seen as a wealth-producing sector of the economy, even though it may involve significant social and environmental costs along the way. For developed countries like the US, Japan and EU, the manufacturing sector today accounts only for 20-25% of the GDP.

Basically, manufacturing means the use of machines, tools and labour to make things for use or sale, so it tells something about the broad-based economic activity in the country. The manufacturing sector is the secondary sector of the three economics sectors. The three-sector hypothesis divides economies into three sectors of activity: extraction of raw materials (primary), manufacturing (secondary), and services (tertiary).

Characteristics of the two PMIs

There are two producers of China Manufacturing PMI. The CFLP China Manu-facturing Purchasing Managers’ Index is the official government index, based on data collected by the National Bureau of Statistics. The second index is made by HSBC and Markit Economics. Different methods of seasonal adjustments, dissimilar samples in size and content plus the bigger weighting to smaller, privately owned business by HSBC/Markit explains some of the difference in the two indices. The PMI should be compared to other economic data sources when used in decision-making.

The official PMI is a composite index based on the seasonally adjusted diffusion indices from five sub-indicators with varying weights: New orders - 30%; Output - 25%; Employment - 20%; Suppliers’ delivery times - 15%; and Stocks of major inputs - 10%. A PMI reading above 50% indicates an overall expansion in the manufacturing sector; below 50, an overall contraction. Diffusion indices have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change and the scope of change.

The official index has a total of 11 sub-indicators, of which the most important ones outside the composite are: New export orders, Stocks of finished goods and imports. The method behind the sampling of the surveyed 727 enterprises from 22 industries is largely based on each industry’s contribution to GDP.

The HSBC China Composite PMI is a weighted average of the Manufacturing Output Index and the Services Business Activity Index, and is based on original survey data collected from a representative panel of over 800 companies based in the Chinese manufacturing and service sectors.

Like the official index, there are also two parts to the monthly PMI releases from HSBC/MARKIT; the first is the headline PMI number, designed to provide a snapshot of the health of the economy; the second is the sub-indices. HSBC/Markit’s sub-indices provide insight into key economic drivers such as inflation, exports, employment and inventories.


BIMCO contact - Shipping Analyst: Peter Sand PS@BIMCO.ORG +45 4436 6800

in Copenhagen, DK
 

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