Demand Recovery Accelerates, Businesses Expect Continued Improvement
As we step into November, the manufacturing sector in China has exhibited signs of gradual recovery, reflected through various indices. This month, the Purchasing Managers' Index (PMI) for manufacturers escalated to 50.3, marking a modest rise of 0.2 percentage points from October. However, this upward movement is notably weaker compared to the traditional seasonal trends observed over recent years. For context, since 2017, the PMI readings for November typically demonstrate an increase of around 0.4 percentage points compared to October. The current PMI reading suggests that while improvements in demand are becoming apparent, they remain fragile.
One critical aspect influencing this PMI performance is the supplier delivery time index, which operates inversely; a rising index indicates shorter supplier delivery times and, consequently, weak demand. Fortunately, the new orders index has also shown a lift this month, climbing back into an expansionary territory for the first time since May, suggesting that internal demand is resurfacing. Substantially, both domestic orders and new export orders indices have shown encouraging signs of improvement. In November, the new domestic order index jumped 0.8 percentage points to 51.2, while new export orders rose similarly by 0.8 percentage points to 48.1. This increase can be attributed to the reorganization of overseas supply chains and quick responses from exporting enterprises aiming to navigate potential tariff challenges.
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The recovery in domestic demand is largely credited to the timely implementation of the 'Two New and Two Heavy' policies, which aim to revitalize consumption and bolster high-tech manufacturing sectors. For instance, the consumer goods manufacturing PMI has notably surged 1.3 percentage points to 50.8 this month, reflecting the tangible effects of these supportive policies. The high-tech manufacturing sector also mirrors this positive trend, with its PMI advancing by 1.1 percentage points to 51.2. In contrast, the high energy-consuming industries remain sluggish, with their PMI slipping 0.1 percentage points to 49.2 due to constraints from the real estate investment sector.
Against this backdrop, the service sector continues to expand, maintaining a PMI of 50.1, although the construction sector represents the primary drawback, where the PMI has notably dropped below the growth threshold for the first time since 2021. Such shifts in the construction index, now at 49.7, can be largely attributed to diminishing real estate investments. While sectors like information technology and capital market services display vibrant activity indexes well above 55.0, the restaurant and retail industries, having enjoyed a temporary boost from holiday consumption, are now experiencing declines in their business activity indexes.
Looking ahead, businesses maintain a positive outlook. Not only have both manufacturing and services experienced advancements in expectation indices, but there is also a growing sense of confidence that government policies aimed at stimulating demand will have an enduring impact. In November, the indices for business sentiment in both sectors increased by 0.7 and 1.1 percentage points to 54.7% and 57.3%, respectively. However, caution is warranted as the looming possibility of enhanced tariffs on all Chinese goods poses significant risks to the export sector, necessitating close monitoring of forthcoming policy measures designed to mitigate the impacts of such tariffs.
Manufacturing Upturn Continues, Non-Manufacturing PMI at a Critical Junction
The manufacturing landscape reveals a consistent rise in PMI, signaling a recovery in both production and demand levels. This month, the manufacturing PMI saw a modest gain, increasing by 0.2 percentage points to 50.3. Encouragingly, both supply and demand dimensions experienced upward shifts, with the production and new orders indices rising 0.4 and 0.8 percentage points to 52.4 and 50.8, respectively. Moreover, despite a significant drop in raw material purchase prices, the indices for raw material inventories held steady, showcasing resilience. Nevertheless, the employment index slightly dipped 0.2 percentage points to 48.2.
A closer examination of the demand reflects significant fluctuations, particularly as new export orders outpaced internal orders this month. The export orders index increased by 0.8 percentage points to 48.1, indicating a booming demand from global markets. Conversely, the order indices for imports and existing contracts saw more modest gains, less than 0.3 percentage points. The uptick in procurement intentions points to a tentative but resolute recovery, with the purchasing volume index rising to 51%, illustrative of a return to expansion territory.
On the non-manufacturing front, the PMI has stabilized at a critical level, edging down 0.2 percentage points to 50%. The service sector PMI retains its position in the expansion zone, helped along by sectors like IT services and finance. However, the downturn in the construction sector is worth noting as its PMI has slipped beneath the neutral mark, hinting at broader economic strains.
Despite the fading holiday effects, service industry expectations have notably risen, supporting the PMI’s position in positive territory. The new orders index, albeit lower due to seasonal factors, remains robust. Positive indicators from domestic and international air traffic reflect an expanding logistical environment, signifying recovery momentum within the broader service sector.
In terms of construction, the persistent decline reflects broader issues with pricing pressures impacting operational profitability. The indices for input and sales prices have dipped significantly, and further analysis shows a troubling trend in the construction industry's new orders and employment figures remaining in contractionary terrain.
Risk Considerations
Changes in external conditions, shifts in the real estate landscape, and slower-than-anticipated policy rollout for economic stabilization remain pressing concerns.