Source: Markit Economics

The recovery of China's manufacturing sector lost some momentum in May while India's PMI (Purchasing Managers' Index) rose to twenty-seven month high, pointing to sharp improvement in business conditions.

China: The recovery of China's manufacturing sector lost some momentum in May, highlighted by a drop in the headline HSBC China Manufacturing PMI - - a seasonally adjusted index designed to measure the performance of the manufacturing economy – to 52.7 from a revised figure of 55.2 in April. May's reading was the lowest in eleven months and indicative of only a modest improvement of operating conditions in the manufacturing sector.

Manufacturing output in China rose again in May. However, the rate of expansion was only modest, and eased to the slowest in twelve months in line with a weaker rise in new business. The slower expansion of new orders was reportedly reflective of relatively lacklustre demand from both home and external markets. New business received from abroad rose at the least marked rate in ten months, although growth was still above the historical series average.

Backlogs of work in the Chinese manufacturing sector were accumulated at a solid rate in May, extending the current period of growth to fourteen months. Those respondents that reported an increase in unfinished business often mentioned that resources had been assigned to meet higher intakes of new business.

Chinese manufacturing employment rose again in May, although the pace at which firms added to their workforce numbers was only slight, and eased to the slowest since June 2009. According to respondents, employment growth reflected greater inflows of new business. Those panellists that reported a reduction in employment linked this to restructuring efforts and, in some cases, an increased number of retirements.

According to the latest data, the average cost of Chinese manufacturers' purchases rose substantially in May, albeit at a markedly slower rate that was the weakest in seven months. Prices paid for grain, oil and steel were all reported to have risen. Input price inflation has now been signalled for eleven months in succession. However, firms were unable to pass on the full extent of cost rises to clients, with output prices increasing at the slowest rate since last October. This primarily reflected higher competition for new business, while there were reports that some firms had reduced their factory gate prices to satisfy client requests.

Commenting on the China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: "The slowdown in the headline manufacturing PMI suggests that the overheating risk is likely to ease as tightening measures filter-through. That said, we see robust economic growth without double-dip risks not least because of massive existing infrastructure investment and resilient private consumption."

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.

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India: The seasonally adjusted HSBC PMI climbed to its highest level since February 2008 in May. At 59.0, up from 57.2 in April, the index pointed to a considerable improvement in operating conditions faced by Indian manufacturers. The PMI has registered above its long-term trend of 55.9 since January.

Production at Indian manufacturers rose sharply and for the fourteenth consecutive month in May. Reports indicated that activity levels were raised in response to further gains in new business. Incoming new work expanded at a substantial pace on the month, which companies linked to favourable economic conditions, strong market demand (from both public and private sectors) and good business reputations. Data revealed that the domestic market remained the primary driver of overall new order growth, as the rise in new work from abroad weakened. Nevertheless, receipts of new export orders continued to increase at a robust pace.

Outstanding business accumulated at an accelerated pace during the latest survey period. The robust increase reflected further growth of new work and delays caused by longer supplier delivery times. To meet sales levels and honour delivery agreements, manufacturers depleted existing stocks of finished goods. Although lead times on raw material deliveries lengthened only moderately in May, the rise was nevertheless a series record. Panel members cited greater demand for inputs, shortages of certain commodities and power cuts as the primary reasons for the latest deterioration in vendor performance.

To accommodate higher production requirements and company expansions, Indian manufacturers hired extra staff and added to pre-production stocks in May. Job creation was modest and the most marked since August 2005. Meanwhile, buying activity rose sharply, resulting in a survey record increase in raw material holdings.

Both input and output price inflation abated somewhat since April. Nonetheless, both measures remained firmly above their long-term series trends. Purchasing costs increased at a rapid pace, which respondents linked to greater raw material prices, especially for metals. Manufacturers passed through part of the input price inflation to customers by way of higher charges, which rose markedly and for the ninth month in succession.