Activity across China's manufacturing sector tanked last month

China’s manufacturing PMI report for November has come in below expectations.

According the government, the index slipped to 49.6 in November, missing expectations for an unchanged reading of 49.8.

PMI reports measure changes in activity across a sector over a one-month period, with a reading below 50 indicating activity levels are contracting.

Not only have activity levels now contracted for four consecutive months, the longest stretch since the global financial crisis, at 49.6, the index now sits at the lowest level seen since August 2012.

Fitting with the weak headline figure, new orders, led by weakness from abroad, along with inventories of raw and finished goods, employment and order backlogs all continued to contract. Despite weak demand, output continued to expand, coming in at 51.9, although this was weaker than the 52.2 level of October. Supplier delivery times held steady at 50.6 for a second consecutive month.

By size of firm, activity levels among large manufacturers continued to expand, rising to 51.2 from 51.0 in October, although this was completely offset by weakness in small and medium sized firms which recorded PMI readings of 44.8 and 48.3 respectively.

Essentially, smaller firms are struggling while larger firms are doing OK.

Fitting with the government’s PMI report, the separate Caixin-Markit manufacturing PMI report – a private sector survey concentrated on the performance of small and medium sized manufacturing firms – also held in contractionary territory in November, coming in at 48.6.

Although above the 48.3 level registered in October, activity levels for smaller manufacturing firms have now contracted for the past nine months.

According to Markit, the slight improvement was partly driven by a stabilisation of output volumes, along with strength in export orders which expanded at the fastest pace seen in 13 months, something that completely bucked the trend seen in the government’s PMI report.

However, fitting with weak domestic demand, order levels from within China continued to contract.

Partially offsetting the weak manufacturing reports, activity levels across China’s services sector accelerated over the same time period with the separate non-manufacturing PMI gauge rising to 53.6 from 53.1 in October.

The index now sits at the highest level seen since July 2015, adding to evidence that China’s economic transitions away from industrial and export led growth to that powered by consumption and services is continuing.

Given the divergent performance between the government’s manufacturing and non-manufacturing PMI reports in November, something that suggests China’s economic transition is gaining traction, markets will be paying close attention to the separate Caixin-Markit services PMI report on Thursday for clarification that the economic rebalancing is truly taking place.

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