Source: Markit Economics

Chinese manufacturing sector PMI (Purchasing Managers' Index) data in August improved at the most marked rate since April 2008 while domestic demand in India continued to power new order growth in August.

China

Latest data signalled that growth of the Chinese manufacturing sector accelerated in August. The headline HSBC China Manufacturing PMI  - - a headline index designed to measure the overall health of the manufacturing sector - - rose to 55.1, from 52.8 in the previous month, its highest level since April 2008 and one indicative of a solid improvement in operating conditions.

Chinese manufacturing production rose for the fifth successive month in August, increasing at the joint second-steepest rate since the start of the series in April 2004. Those survey participants that reported an expansion of output generally attributed this to an improved business climate and further gains in new business.

August data pointed to a strong and accelerated improvement in Chinese manufacturers’ order book levels, extending the current period of expansion to five successive months. Where new business growth was signalled, this was frequently linked to strengthening demand from home and abroad. Data suggested that the primary source of demand strength came from the domestic market, with exports sales rising at a weaker rate than overall new work. Even so, foreign order levels increased at the sharpest pace since June 2007. August marked the third month running in which employment in the Chinese manufacturing sector has risen. The expansion of workforce numbers was modest, but the strongest for sixteen months. Of those companies that signalled employment growth, many attributed this to rising production requirements.

Input price inflation accelerated substantially in August, hitting a thirteen-month high, mainly driven by increased prices for a number of raw materials (with steel mentioned in particular). Increased input costs encouraged firms to raise their output charges for the second straight month in August. However, companies were unable to pass on the full extent of the rise in costs to clients, with output price inflation much weaker than that of input prices.

Commenting on the China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China at HSBC said:“The HSBC China Manufacturing PMI recording a 16-month high in August reconfirmed that China’s recovery is keeping up strong momentum. With the construction works being implemented at full speed to generate demand for industrial goods, domestic demand has been substantially lifted as indicated by significant improvements in the output and new orders indexes, both of which are close to series record highs. Meanwhile, the New Export Orders Index also rose meaningfully, implying China’s exports are improving thanks to the stabilization or even recovery in external markets. As a result, manufacturing enterprises are now able to hire more workers to meet increased demand.

These findings suggest that the Chinese manufacturing sector is likely to see further improvements in the coming months, adding fuel to overall growth recovery. Despite the pick up in both price indexes, core inflation should remain checked given that manufacturers can only pass a fraction of increased input costs to customers.”

The HSBC China Report on Manufacturing is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 400 industrial companies. The panel is stratified geographically and by Standard Industrial Classification (SIC) group, based on the regional and industry contribution to Chinese Industrial production.

Source: Markit Economics

India

Domestic demand continued to drive the recovery in India’s manufacturing economy during August. Although new export work grew only slightly, total new business and output continued to expand markedly. Data suggested that higher new order levels exerted manageable pressure on capacity at manufacturing units, as backlogs and employment both fell marginally. With regard to prices, input cost inflation accelerated to its fastest for nearly a year, while charges were stable.

The seasonally adjusted HSBC Markit Purchasing Managers’ Index (PMI) posted 53.2 in August, to indicate a robust improvement in the health of India’s manufacturing industry. However, the the index was down from 55.4 in July, signalling that the rate of improvement slowed over the month.

Total incoming new business to Indian manufacturers expanded for the fifth straight month in August, and at a considerable pace. Data showed that the increase was largely powered by the home market, as new export order growth remained subdued. A better economic situation, successful marketing activities and good standing with clients were given by respondents as the primary factors underlying the rise. However, the latest gain in new work was the least marked since April.

Reflecting the trend in new work, Indian manufacturing output grew at a weaker pace during the latest survey period. Even so, the rate of expansion remained strong overall.

Higher new order and production levels led Indian manufacturers to purchase more inputs and enlarge their stocks of raw materials in August. Both buying activity and pre-production inventories rose solidly, albeit at softer rates than in July.

Average vendor performance improved slightly during August, after deteriorating over the previous two months. Anecdotal evidence indicated that suppliers sped up their order processing and delivery times as demand intensified.

The index tracking trends in outstanding business at Indian manufacturing units remained close the the neutral level of 50.0 in August, as it has done for the past six survey periods. This suggested that workloads were manageable, despite further growth of new orders. The absence of capacity pressures was also indicated by a second successive decrease in staffing numbers across the industry. Falling employment indicates that manufacturers boosted productivity to accommodate demand. That said, the rate of job shedding was only mild.

Indian manufacturers reported a sharp rise in their average purchasing costs in August. Moreover, input price inflation accelerated to its fastest since last September. However, competitive pressures forced firms to shoulder their greater cost burdens. Charges were unchanged from July.

Commenting on the India Manufacturing PMI survey, Robert Prior-Wandesforde, Senior Asian Economist at HSBC said: “While India’s manufacturing PMI remains comfortably above 50.0, it is disappointing to see the index slip in August to a level that is 2.5 points below its recent high in May this year. In our view, this is more likely to represent a pause for breath than a peaking out of the industrial cycle. After all, there is still plenty more in the way of fiscal and monetary stimulus effects to come through to the economy, while we remain hopeful that exports, particularly to the rest of Asia, will recover shortly.

“Another notable feature of the release is the further increase in the input prices balance (to 57.7 from 56.3 in July and a low of 41.2 in January). This no doubt reflects the impact of higher commodity prices but it is interesting that manufacturing companies are not sufficiently confident to pass on these price rises. The output prices index actually slipped slightly to 50.0. This in turn suggests profit margins are being squeezed.”

The HSBC India Manufacturing PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 500 industrial companies.