Fall In New Work Drags Production In China Into Contraction In June - Caixin China General Manufacturing PMI
June data highlighted a challenging month for Chinese manufacturers, with trade tensions reportedly causing renewed declines in total sales, export orders and production and companies responded by reducing headcounts further and making fewer purchases of raw materials and semi-finished items. At the same time, selling prices were raised following another increase in input costs, though rates of inflation were negligible. Business sentiment was broadly neutral at the end of the second quarter, with firms mainly concerned about the US-China trade dispute. Falling from 50.2 in May to 49.4 in June, the headline seasonally adjusted Purchasing Managers Index, a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy was below the critical 50.0 threshold for the first time in four months. The latest figure was, however, indicative of only a marginal deterioration in operating conditions.
Amid reports of trade tensions, total new business and international sales declined at the end of the second quarter. The former contracted for the second time in 2019 so far, albeit moderately. Concurrently, the fall in exports followed from a renewed increase in May.
Goods producers lowered output in June, thereby ending a four-month sequence of expansion. That said, the pace of contraction was only slight. Sub-sector data indicated that consumer goods bucked the trend and was the only category to record production growth in June.
As has been the case since April, Chinese manufacturers shed jobs during June. The pace of contraction was broadly similar to those seen in the remainder of the second quarter. Anecdotal evidence suggested that voluntary leavers had not been replaced.
Ongoing job shedding added pressure on the capacity of manufacturers’ operations, with outstanding business up again in June. The rate of backlog accumulation was slight, however, and broadly similar to those seen earlier in the second quarter.
Amid reports of a lack of new work and lower production needs, quantities of purchases decreased in June. The fall reversed the upturn noted in the prior survey period, but was only slight.
Despite reaching a seven-month high in June, the rate of input cost inflation remained mild in the context of historical survey data. Similarly, there was a slight rise in factory gate charges, following no change in May.
Inventory trends diverged in June, with holdings of inputs rising and that of finished goods decreasing. The fall in the latter was associated with lower production and the delivery of products to clients.
Overall sentiment towards the 12 month outlook for production among Chinese manufacturers was broadly neutral in June. Some companies expected the launch of new products and expansion plans to boost output in the year ahead, while others were concerned about the US-China trade tensions.
Commenting on the China General Manufacturing PMI™ data, Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group said “The Caixin China General Manufacturing Purchasing Managers’ Index was 49.4 in June, the second lowest since June 2016, indicating a clear contraction in the manufacturing sector.
1) The subindex for new orders slid into contractionary territory, pointing to notably shrinking domestic demand. The gauge for new export orders returned to contractionary territory, but was better than the levels seen from last April to last December. Front-loading by exporters was likely to support this gauge as the China-US trade relationship was under great uncertainty.
2) The output subindex fell into contractionary territory. The employment subindex remained relatively stable in negative territory, likely due to government policies to stabilize the job market. The State Council set up a leading group on employment in late May.
3) While the subindex for stocks of purchased items remained slightly higher than the 50 mark that divides expansion from contraction, the measure for stocks of finished goods stayed in contractionary territory, indicating that manufacturers were reluctant to replenish them. The subindex of suppliers’ delivery times stayed in contractionary territory, pointing to delayed delivery and also suggesting relatively low inventory levels and willingness to restock.
4) The gauges for input costs and output prices both edged up into expansionary territory. Due to supply-side structural reform, prices of industrial products remained stable.
5) The subindex measuring sentiment toward future output plunged further, albeit staying in expansionary territory, a reflection of continuously weakening business confidence amid the Sino-US trade conflict.
Overall, China’s economy came under further pressure in June. Domestic demand shrank notably, foreign demand was still underpinned by front-loading exports, and business confidence fell sharply. It’s crucial for policymakers to step up countercyclical policies. New types of infrastructure, high-tech manufacturing and consumption are likely to be the main policy focuses.”
Source : Strategic Research Institute