Source: Markit Economics

China's manufacturing output fell in June and there was only a marginal growth in the sector. India's manufacturing sector expanded in the month.

China: At 50.4, down from 52.7 in the previous month, the headline HSBC China Manufacturing PMI (Purchasing Managers' Index - -  a seasonally adjusted index designed to measure the performance of the manufacturing economy  -- signalled only a marginal improvement in Chinese manufacturing sector operating conditions.

Manufacturing output in China fell during June, ending a fourteen-month period of expansion. Although only marginal, the pace of contraction contrasted with near-record growth registered at the start of the year. For the first time in fifteen months, the level of new business taken by Chinese manufacturing firms fell in June. The rate of decline in new work was only fractional, but marked a distinct turnaround from strong growth seen throughout Q1 2010. Those respondents that reported a drop in new orders widely commented that this reflected softer market demand. New orders placed by foreign clients also fell in June, with the pace of decline the fastest since March 2009. Manufacturers widely mentioned that reduced new export business reflected lacklustre global demand.

Manufacturing employment in China rose for the thirteenth month running in June. The rate at which firms added to their workforce numbers was modest, though slightly faster than in the previous month. Manufacturers reported adding to their payrolls as part of efforts to expand productive capacity.

Output prices set by Chinese manufacturing firms fell for the first time in twelve months during June. Anecdotal evidence suggested that reduced output charges reflected lower input costs and, in some cases, client requests for price discounts.

Latest data signalled that average input costs fell in June, ending a sequence of inflation that had stretched to eleven months. Where a decline in cost burdens was signalled, companies widely attributed this to lower raw material prices.

In response to lower production requirements, purchasing activity in the Chinese manufacturing sector fell in June. The pace of reduction was only modest, but contrasted with rapid growth seen around the turn of the year. The fall in purchasing also reflected a utilisation of existing pre-production inventories, which fell for the first time in seven months.

Commenting on the China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: "The moderation in the manufacturing PMI implies slower sequential growth in China’s manufacturing sector, partly due to the tightening measures taking effect. But fears about hard-landing are overplayed. We expect China to achieve around 9% growth in 2H underpinned by massive ongoing investment and robust private consumption."

Indian manufacturers sharply raised production during June, primarily in order to accommodate a similarly considerable increase in new business. Reports suggested that favourable economic conditions and good company reputations had supported demand. Although new export order growth accelerated since May, the expansion of total new work remained much more pronounced.

As workloads increased in June, so did volumes of outstanding business. Backlogs of work accumulated markedly, which panel members also linked to delays caused by power cuts. Despite a faster build up of unfinished work, manufacturers did not add to payrolls during the latest survey period. Overall employment levels were unchanged, with the vast majority of companies (approximately 96%) maintaining staffing numbers on the month.

Input acquisitions made by Indian manufacturers rose for the fifteenth month running in June, and at a substantial rate. Respondents stated that higher buying activity reflected greater workloads and efforts to rebuild pre-production inventories. Consequently, stocks of purchases grew markedly, albeit more slowly than in May.

Stronger demand for inputs led to another deterioration in average vendor performance at the end of Q2. Lead times on input deliveries to Indian manufacturers lengthened modestly, but to a lesser degree than in the previous month.

Inflationary pressures moderated in June – sharply in the case of input prices (the respective index dropped by over ten points since May). As a result, purchasing costs rose at the mildest pace for a year. In the 15% of cases where input prices increased, panellists mentioned higher raw material and fuel costs. The slowdown in charge inflation, which reflected the more subdued rise in input costs, was less pronounced. Factory gate prices rose modestly and at the weakest rate since February.