Source: Markit Economics

Both Chinese and Indian manufacturing PMI (Purchasing Managers' Index) continued to grow at a robust rates in February.

Marked growth of Chinese output and new business led to solid improvement in overall operating conditions:Despite slipping to a three-month low of 55.8 in February, the headline HSBC China Manufacturing PMI posted a level indicative of a marked improvement of operating conditions in the Chinese manufacturing sector. Chinese manufacturing production increased for the eleventh month running in February. Despite easing to the slowest since last November, the rate of expansion was still marked. Where a rise in manufacturing output was signalled, respondents attributed growth to further gains in new business.

The level of new work received by Chinese manufacturers rose again in February. New business growth remained sharp, despite easing from January’s near-record. Those firms that reported a rise in new order intakes often linked this to firmer client demand. Export sales increased to the greatest extent since March 2005. Anecdotal evidence suggested that this mainly reflected improved economic conditions among a number of China’s key trading partners. Staffing levels continued to rise in February, although the rate at which firms added to their workforce numbers was only marginal and the slowest in seven months. Business expansion plans and rising production requirements were cited by panellists as having supported employment growth.

Average input costs rose for the eighth consecutive month in February. Although much slower than one month previously, the rate of inflation was still considerable. Prices paid for aluminium, coal, oil, steel and zinc were all reported to have risen.

Latest data signalled that prices charged rose in February, albeit to a much lesser extent than one month ago. Those firms that reported an increase in factory gate prices widely attributed inflation to rising prices for a range of raw materials.

Purchasing activity increased markedly in February, largely as a result of rising output requirements. Subsequently, the average time taken by vendors to deliver inputs to manufacturers lengthened for the seventh month in succession. Data also signalled that firms accumulated pre-production goods at the fastest rate since the start of the series in April 2004. Panellists widely commented that higher stock levels reflected strong sales and output forecasts.

Commenting on the China Manufacturing PMI survey, Hongbin Qu, Chief Economist for China at HSBC said: “Despite the moderation in the headline China Manufacturing PMI, growth momentum for China’s manufacturing sector remains strong, pointing to a further acceleration in industrial activities in the coming quarters.”

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.

Indian manufacturing continued to gain strength in February, with output, new orders and employment all rising at faster rates: The seasonally adjusted HSBC Markit PMI rose for the third month running in February. At 58.5, up from 57.6 at the start of Q1, the index pointed to a considerable improvement in operating conditions faced by Indian manufacturers.

Underpinning the latest rise in the headline index were faster increases in new orders, output and employment:Overall new business received by Indian manufacturers rose sharply in February. Data indicated that the increase was the most marked for a year-and-a-half and primarily supported by strong gains in domestic new orders. Although growth of incoming new work from abroad moderated on the month, it remained strong and above its pre-crisis trend. Better global economic conditions, successful advertising campaigns and good company reputations all contributed to the latest expansion, according to respondents. Production levels were raised substantially to accommodate the increase in new work.

Manufacturers had to use part of their existing holdings of finished goods to meet sales levels in February. Consequently, post-production holdings fell slightly. Meanwhile, pre-production inventories continued to expand, as firms reacted to market demand and raised their buying activity. Raw material purchases rose at a considerable pace that was the fastest for two years.

Despite stronger demand for inputs, vendors managed to reduce their delivery times, albeit only marginally. The index tracking trends in average supplier performance has registered close to the neutral level of 50.0 for a year, suggesting that lead times have been largely unchanged over this period. As workloads mounted in February, Indian manufacturers noted a slight build up of outstanding business. To meet production requirements and ease pressures on capacity, companies took on new staff at a moderate pace that was the most pronounced for nineteen months.

Input price inflation remained sharp during the latest survey period, with panellists reporting greater fuel and raw material costs. Higher prices for metals were particularly commented on by several firms. However, the rate of increase eased on January’s series peak. Charge inflation slowed to a modest pace in February from the previous month’s one-and-a-half year high, which respondents linked to greater competitive pressures.

Commenting on the India Manufacturing PMI survey, Robert Prior-Wandesforde, Senior Asian Economist at HSBC said: “Having wobbled slightly towards the end of last year, India's manufacturing PMI has now shown three consecutive improvements, hitting levels last seen in mid-2008. At 58.5, the headline index is consistent with on-going double digit gains in industrial production which in turn is likely to mean that spare capacity is being eaten into rapidly. Although the output prices balance surprisingly dropped back in February (while remaining consistent with price gains) there is more and more evidence of emerging supply-side constraints in labour and product markets. The breakdown of the PMI, for example, indicates that the balance of companies are now hiring again and at an historically robust rate. In our view, it is time to start unwinding the monetary stimulus and we would be very surprised if the RBI were not to raise policy rates at the 20 April meeting.

“While new export orders grew less strongly in February than January this didn't prevent the overall new orders series from hitting a high in the current upturn. The same was also true of output growth, which has rarely shown such strength since the series began in April 2005.”

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