This reliable leading indicator on Chinese industrial activity just tanked

  • Chinese industrial data could be about to deteriorate further, at least in the near-term.
  • Macquarie Bank’s forward-looking indicator on Chinese industrial activity “fell significantly in November,” pointing to the likelihood of a similar move in upcoming PMI data.
  • Despite the large plunge in the indicator, Macquarie says it may not be reflected in hard economic data that will be released in mid December.

Concerns about the Chinese economy are flaring again, contributing to the broader selloff in financial markets seen this year.

Those concerns may be about to get even more acute, at least in the short-term.

Macquarie Bank’s China Business Cycle Indicator (MCBCI), a forward-looking indicator on Chinese industrial activity, “fell significantly in November”.

“[This] suggests that near-term risks to Chinese industrial production growth remain to the downside,” Macquarie says.

As seen in the chart below from the bank, the MCBCI has a fairly decent track record for predicting movements in China’s official manufacturing PMI released by the government.


PMIs measure changes in perceived activity levels from one month to the next, capturing changes in output levels, new orders, new export orders, inventories, supplier deliveries, employment and input and end-user prices.

While the move in Macquarie’s indicator suggests China’s November PMI print could be pretty horrible, at least compared to recent standards, the bank says caution is warranted when extrapolating the results to hard industrial data that will be released in the coming weeks.

“In China, while the PMIs and now the MCBCI have dipped, reported industrial production growth has shown signs of stabilising in recent months, with the three-month annualised measure picking up a little in October,” Macquarie says.

As opposed to industrial production which measures actual activity, both PMI’s and the MCBCI measure reported activity levels. They’re sentiment surveys, rather than measuring actual economic activity on the ground.

Macquarie says the divergence between the soft and hard economic indicators last month could reflect that “businesses remain fearful in the face of new tariffs”.

While Macquarie says the MCBCI is probably overstating the weakness in China’s industrial sectors, the bank says is still expects Chinese growth to “remain soggy into the New Year”.

China’s November PMI will be released on November 30.

In October, the PMI fell to 50.2, indicating that activity levels were almost unchanged from September. It was the weakest result since July 2016.

In contrast, industrial output in China grew by 5.9% in the year to October, a small improvement on the multi-year low of 5.8% reported in the year to September.

The acceleration followed a series of stimulus measures rolled out by Chinese policymakers in prior months to help support economic activity after a slowdown in the September quarter.