Source: Markit Economics

November Chinese PMI (Purchasing Managers' Index) data pointed to strong improvement in manufacturing operating conditions and export sales increased at the fastest rate since March 2005. Meanwhile, the Indian manufacturing economy expanded solidly in November, but at a weaker pace.

China

The headline HSBC China Manufacturing PMI rose to 55.7 in November, from 55.4 in the previous month, pointing to the most marked improvement of operating conditions in the Chinese manufacturing economy since the first month of data collection in April 2004.

Chinese manufacturers reported that output growth was maintained for the eighth month running in November. The rate of expansion remained strong, accelerating slightly from the previous month. Where an increase in production was signalled, panellists widely attributed this to greater inflows of new work, which rose at a considerable rate. New product launches and favourable market conditions were cited by some respondents as having led sales higher, although firmer demand was the most frequently mentioned factor supporting new business growth.

Data signalled that export sales at Chinese manufacturers rose again in November, increasing at the fastest rate since March 2005. Those firms that reported an increase in new export business widely attributed this to stronger external demand. November data signalled that staffing levels in the Chinese manufacturing sector increased at the second-fastest rate in the survey history, extending the current period of growth to six months. Evidence provided by the survey panel suggested that job creation mainly reflected further gains in new work, while there was also some mention of business expansion policies.

Average input prices faced by Chinese manufacturers rose sharply in November. Brass, chemicals, coal, petroleum and steel were all reported to have risen in price on the month. However, strong competitive pressures meant that firms were unable to pass on the full extent of the rise in costs to clients, with prices charged rising at a much slower rate than overall cost burdens. Even so, output price inflation was marked, and far faster than the series average.

Purchasing activity rose further in November, increasing at a considerable rate that was the third-fastest recorded by the series to date. Increased input buying continued to increase pressure on supplier capacity, with average lead times lengthening for the fourth month in a row.

Commenting on the China Manufacturing PMI survey, Hongbin Qu, Chief Economist for China at HSBC said: “The sustained improvement in the HSBC China Manufacturing PMI implies that China’s recovery has been consolidated. Rising new orders and production, plus the rapid expansion of new export orders, have and will generate new jobs. Despite the increasing inflationary pressure on input prices, inflation in finished goods will be relatively mild given the still excessive capacity in many sectors.”

The HSBC China Report on Manufacturing is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 400 manufacturing companies.

Source: Markit Economics

India

The seasonally adjusted HSBC PMI signalled a solid improvement in the health of India’s manufacturing economy. However, growth of output, new business and employment - - the three largest components of the PMI - - all slowed over the month. The headline index fell from 54.5 in October to 53.0 as a result, indicating that the sector expanded at a slower pace.

Incoming new work to Indian manufacturers rose for the eighth straight month in November, and at a robust pace. Data showed that the home market remained the main driver of total new order growth, as new export business increased only modestly. Better economic conditions, successful promotional activities and strong reputations for quality underlay the expansion, according to panel members.

Indian manufacturers increased their efforts to catch up on unfinished work during the latest survey period. Consequently, outstanding business fell at an accelerated pace, despite further gains in new orders. Mainly as a result of new business growth, but also due to further backlog depletion, production increased at a marked pace during November.

Greater production requirements led manufacturers to take on more staff and build up stocks in November. Employment continued to rise at a marginal pace, as did holdings of finished goods. Anecdotal evidence suggested that cost pressures prevented faster expansions in these variables. Growth of pre-production inventories was more robust, underpinned by a strong increase in input buying activity. However, rates of growth in both purchases and raw material stocks eased further since October.

The time between order placement at vendors and input deliveries to manufacturing units shortened in November. However, the improvement in average vendor performance was only slight, suggesting that suppliers’ workloads remained manageable.

Average input costs rose markedly since October, albeit at the weakest pace for five months. Respondents blamed higher raw material costs for the inflation. To prevent rising purchasing costs from eroding profit margins, firms increased their charges at an accelerated pace.

The latest round of output price inflation was the fastest since September 2008.

Commenting on the India Manufacturing PMI survey, Robert Prior-Wandesforde, Senior Asian Economist at HSBC said: “While still consistent with a month-on-month expansion of the manufacturing sector, the headline PMI looks to be slowly slipping back. The November index reading of 53.0 was the weakest since March and is down 2.8 points from the recent high in May; the drop driven largely by slower growth in both new orders and output.

This is disappointing and fits with the notion that the best of India's industrial recovery is already behind us. In our view, year-on-year industrial production growth will level off over the next few months before dropping back somewhat in 2010 as the domestic inventory build subsides. This doesn't necessarily mean that ex-agriculture GDP growth will soften, however, as the much bigger service sector of the economy will increasingly take up the running in our view.

“The ongoing strong rise in input prices looks increasingly to be feeding through into output prices, which showed their strongest rise since September last year. This will continue to be reflected in higher Wholesale Price Inflation which we still expect to hit 8% by March next year.”

The HSBC India Report on Manufacturing is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 420 manufacturing companies.