China's smallest manufacturers haven't had it this good in years

Photo by Todd Korol/ Getty Images.

Activity levels for smaller Chinese manufacturers improved sharply in December, expanding at the fastest pace seen in nearly four years.

The Caixin-Markit manufacturing purchasing managers index (PMI) rose by 1 point to 51.9, leaving the index at the highest level seen since January 2013.

The PMI measures changes in activity levels for small and medium-sized Chinese manufacturing firms from one month to the next. A reading above 50 indicates that activity levels improved during the month while a sub-50 figure suggests that they deteriorated.

In a nutshell, the higher the number the better.

Activity levels have now improved or held steady in each of the past five months, an outcome that has not been seen since mid-2014.

Markit said that production expanded at the fastest pace in nearly six years, supported by a solid increase in total new work.

“A number of panelists commented on stronger underlying demand and new client wins,” said the group.

“This was highlighted by a sustained increase in new business during December. As was the case for output, the rate of new order book expansion accelerated since November, and was the strongest since July 2014.”

Markit said that improved domestic demand was the key driver of new business growth, noting that new export sales were unchanged during the month.

This indicates that the strength was entirely driven by domestic factors, rather than improved demand from abroad.

As a result of the pick-up in domestic demand, along with continued job cuts across the sector, order backlogs continued to lengthen, growing for the 10th consecutive month in December.

“There were also reports that fewer workers had also contributed to higher amounts of unfinished work,” said Markit, noting that firms reduced their workforce numbers for the 38th month in succession.

It also noted that “input price inflation picked up to its sharpest since early 2011 amid reports of higher raw material costs, which prompted firms to raise their selling prices at a marked rate”.

This suggests that the rebound in producer price inflation seen in the latter parts of 2016 is now starting to stoke downstream inflationary pressures, further eroding the likelihood of any additional near-term monetary or fiscal stimulus from policymakers in early 2017.

While an undoubtedly bullish report, and one that adds to evidence suggesting China’s manufacturing sector ended 2016 far stronger than where it began, the improvement registered in December was at odds with the official manufacturing PMI report released by the Chinese government earlier this week.

Within that report, the subindices for small and medium sized firms came in at 49.6 and 47.2 respectively, indicating that activity levels for smaller manufacturers actually deteriorated in December.

This is in stark contrast to the performance registered in the Caixin-Markit survey which specifically looks at performance of smaller manufacturing firms in China, rather than firms of all sizes found within the government report.

It’s unusual, and casts doubt on the notion adopted by some analysts that the government tends to overstate how the economy truly is performing.

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