China’s factory activity grows at slower pace in April as order, price pressure undercuts economic recovery
- Official manufacturing purchasing managers’ index (PMI) remained in expansion territory for a second consecutive month in April, although the pace slowed
- Officials admitted that manufacturers are facing higher costs, but some analysts said recovery in industrial activity would continue into the second quarter
Contractions in gauges measuring orders and output prices, as well as a new high for the production subindex, indicated pressure on future demand and capacity, despite the continued expansion of China’s manufacturing activity in April, analysts said.
Factory activity remained in expansion territory for the second consecutive month, with the official manufacturing purchasing managers’ index (PMI) – a survey of sentiment among factory owners – standing at 50.4.
The figure, though, remained above the watershed level of 50, indicating expanding activity, after the reading in March had ended five consecutive months of contraction.
This in turn could dampen the recovery in corporate profits and private investment
“Though economic activities continue to expand, more manufacturers are facing higher costs,” senior NBS statistician Zhao Qinghe said.
Within the official manufacturing PMI, the subindex gauging new orders dropped to 51.1 from 53 in March, while the new export order subindex fell to 50.6 from 51.3, indicating that demand has not yet been fully consolidated.
“The pricing power of producers is still weak, as seen in the faster expansion of production activities than demand, coupled with the contraction of output prices and the expansion of input prices,” said Junyu Tan, economist for North Asia with credit insurance company Coface.
“This in turn could dampen the recovery in corporate profits and private investment.”
Chinese manufacturers had seen their profits fall by 3.5 per cent year on year in March, ending seven consecutive months of growth as falling prices ate into margins.
“Unless Beijing puts a floor under deflationary pressures and engineers a rebound in domestic consumption, profit growth will remain tepid throughout the year,” consultancy firm Trivium said on Tuesday.
As profits dropped, the production subindex within the official manufacturing PMI rose to a 13-month high of 52.9 from 52.2 in March.
“China’s strong manufacturing investment and capacity expansion in recent quarters may exacerbate overcapacity concerns. Potential reactions from trading partners could become a growing concern and create uncertainty about improving export orders,” Tan added.
This is the clearest proof of rather weak demand and economic recovery
Data from Dutch multinational banking and financial services corporation ING also pointed to a capacity build-up in some new industries, with manufacturing strength this year concentrated in the technology and car sectors, with semiconductor manufacturing up 40 per cent year on year in the first quarter.
Zhu Tian, a professor with the China Europe International Business School in Shanghai, said April’s producer price index (PPI) – which measures the cost of goods at the factory gate – may continue to disappoint.
“Overall, the manufacturing PMI remains marginally above 50, but it lacked the momentum to rise this month,” Zhu said.
But Lynn Song, ING’s chief economist for Greater China, remained upbeat about the overall outlook.
“Most subcategories pulled back slightly in April, but last month’s trends continued. The manufacturing PMI continues to signal that the recovery in industrial activity will continue into the second quarter,” Song said.
“Encouragingly, we saw the PMI above 50 for all firm sizes. The PMI for medium-sized enterprises hit a 14-month high of 50.7, while large-sized enterprises fell to a five-month low of 50.3.”
Purchase quantity and inventories increased on a positive outlook among businesses.
The Caixin/S&P PMI focuses more on small and medium-sized private manufacturing enterprises, while the official PMI represents a broader spectrum of the manufacturing sector, including large state-owned enterprises.
“Overall, in April, the manufacturing sector continued to improve, with accelerated expansion in supply and demand, sweetened by exceptional performance in overseas demand. Logistics and transportation functioned smoothly,” said Wang Zhe, senior economist at the Caixin Insight Group.
“Purchase quantity and inventories increased on a positive outlook among businesses. However, employment had yet to show improvement, and price levels remained low, particularly on the sales side, eating into profits.”
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Meanwhile, China’s official non-manufacturing PMI – a measurement of sentiment in the service and construction sectors – stood at a three-month low of 51.2 in April compared to 53 in March.
The gauge marked a fifth straight month of expansion, but Song pointed to weak consumer activity as pent-up demand for travel and gatherings continued to fade following the Lunar New Year holiday.
The new order subindex within the construction sector gauge fell to 45.3 from 48.2 in March, signalling the continued drag from the property sector.
