China's manufacturing sector hasn't looked this good in over 2 years

Photo by Feng Li/Getty Images

China’s manufacturing sector is humming right now.

The government’s latest purchasing managers index (PMI) jumped to a more than two-year high of 51.7 in November.

The figure was higher than the 51.2 level of October and expectations for a decline to 51.0.

It was the equal-highest level since April 2012, matching the figure reported in July 2014.

The PMI measures changes in activity levels across China’s manufacturing sector from one month to the next. A reading above 50 indicates that activity levels are expanding while a sub-50 figure suggests they are contracting.

50 is deemed neutral, with the distance from this level indicative of the strength of the expansion or decline.

Though not high by historical standards for China, as shown in the chart below, activity levels are definitely on the improve.

According to the China’s National Bureau of Statistics (NBS), the improvement was yet again driven by larger manufacturing firms whose PMI jumped 0.9 points to 53.4.

Activity levels for medium-sized manufacturers also returned to growth, rising 0.2 points to 50.1. Smaller manufacturers, in comparison, saw activity levels weaken with the subsector PMI slipping 0.9 points to 47.4.

Reflective of the strength in the headline PMI, the NBS reported that production, new orders and purchase quantities all improved at a faster pace than October, a good sign for activity levels in the months ahead.

Imports and new export orders also expanded having contracted in the previous month.

Despite the clear improvement in activity levels, firms continued to shed staff, albeit at the slowest pace seen in over a year, while the cost of raw materials continued to soar, hitting another multi-year high of 68.3.

Good news for the global economy, especially given that it’s not just the manufacturing sector that is looking healthy.

Others, including services, are too.

The government’s non-manufacturing PMI — released alongside the manufacturing report — rose to 54.7 in November, some 0.7 points higher than the level reported for October.

It now sits at the highest level seen since June 2014, indicating that activity levels across other sectors in the economy are now expanding strongly.

Taken together, the reports indicate that China’s economy is ending 2016 on a strong footing, something few believed was possible when tepid economic data earlier this year was roiling financial markets.

The recovery this year, in part, has been driven by a surge in public infrastructure spending and residential construction, helping to not only underpin economic growth but also commodity prices.

With the economy now clearly strengthening, the question now is whether the government will persist with fiscal stimulus heading into 2017.

There’s already signs that it is with China‚Äôs National Development and Reform Commission (NDRC) approving infrastructure projects worth 338 billion yuan so far in November, adding to the 299 billion yuan approved in October.

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