Chinese manufacturers haven't been this pessimistic since at least 2012

STR/AFP/Getty Images
  • Activity levels at Chinese manufacturing firms continued to improve last month, bucking economist expectations for weakness.
  • New orders from both home and abroad increased, despite an escalation in trade tensions with the United States.
  • Despite firmer demand, confidence slipped to the lowest level since at least April 2012.

Activity levels at Chinese manufacturing firms continued to improve last month, according to the Caixin-IHS Markit manufacturing PMI for May, a result at odds with the weakness reported in the Chinese government’s official PMI over the same period.

The IHS Markit PMI stood at 50.2 in May after seasonal adjustments, unchanged from the level reported in April.

Markets were looking for the PMI to decline to 50.0 last month, reflecting weakness in the official PMI which slipped to 49.4, down 0.7 points on the level reported in April.

The Caixin-IHS Markit PMI measures perceived changes in activity levels across China’s manufacturing sector from one month to the next.

Anything above 50 signals that activity levels improved while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.

Unlike the government’s manufacturing PMI that includes firms of all sizes, including those that are state-owned and operated, many see the Caixin-IHS Markit PMI as a better gauge of activity levels at small and medium-sized firms from China’s private sector.

The government’s PMI reported that activity levels at small and mid-sized manufacturers actually deteriorated at a faster pace in May compared to a month earlier.

IHS Markit

At odds with responses in the government’s PMI that suggested new orders declined last month, those firms in the IHS Markit survey said new orders from both within China and abroad increased.

“Underpinning the positive PMI figure was a further increase in total new orders placed with Chinese goods producers,” IHS Markit said in a statement.

“The rate of new business growth quickened slightly since April, supported by a renewed increase in new export sales.

“According to panellists, new product releases and firmer foreign demand supported the expansion.”

Respondents in the government’s PMI reported a decline in new orders from both within China and abroad.

IHS Markit said the lift in demand supported a “renewed expansion in buying activity among Chinese manufacturing firms” and “further pressure on capacity”.

However, that didn’t help to boost staffing levels which fell slightly for a second consecutive month.

Despite increased order books, pessimism towards operating conditions in the year ahead increased, reflecting increased geopolitical tensions with the United States, China’s largest bilateral trade partner.

“Business confidence slipped to the lowest level since the series began in April 2012 in May amid concerns of an escalating China-US trade
war and forecasts of relatively subdued global demand,” IHS Markit said.

So while operating conditions are reasonable for Chinese manufacturers at this point in time, there’s increased concern the lift in demand will be sustained in the year ahead.

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