China's manufacturing activity fell to a
three-month low in December but rising raw material costs raised inflationary
pressures according to a report on Thursday. Meanwhile Japanese manufacturing
activity contracted for a fourth straight month in December but the rate of
deterioration was the slowest in three months.
China: December data pointed to a
continued improvement of Chinese manufacturing sector operating conditions.
However, overall growth of the sector lost momentum, with both output and new
business rising at the slowest rates in three months. The slowdown in new order
growth was insufficient to prevent a further rise in backlogs of work, which in
turn prompted firms to hire additional staff on average. Considering inflation,
firms continued to pass on sharply rising input costs to clients through
increased output charges.
The headline seasonally adjusted HSBC
Purchasing’ Managers Index (PMI) fell to a three-month low of 54.4 in December,
from 55.3 in November. Nonetheless, for Q4 as a whole, overall growth of the
sector was the strongest since Q1 2010.
Manufacturing output increased steeply in
December, albeit at the slowest rate in three months. Where a rise in output was
signalled, panellists often linked growth to continued new business wins. The
rate of expansion in new work eased since November, but remained strong in the
context of historical data. Growth of new work was supported by strong
underlying demand. However, data suggested that overall growth centred on the
domestic market, with new export business increasing at a much slower rate than
total new orders. Indeed, the rate of expansion in new export orders was only
Outstanding business continued to rise in
December, although the rate of growth eased since November. Further backlog
accumulation predominantly reflected greater inflows of new business and, as a
result, growing pressure on manufacturers’ operating capacity. Consequently,
firms added to their staff numbers in December, with the rate of job creation
quickening to the fastest since June.
Average input prices rose further in
December. Although still substantial, the rate of input cost inflation eased to
the slowest in three months. Higher raw material prices continued to drive
inflation in the latest survey period, with basic metals mentioned in
particular. Consequently, firms continued to pass on higher costs to clients
through increased output charges. Similar to the trend in input prices, the rate
of output price inflation eased since November, but remained much stronger than
the long-run trend.
Commenting on the China Manufacturing PMI survey, Hongbin Qu,
Chief Economist, China & Co-Head of Asian Economic Research at HSBC said:
"Inflation rather than growth still remains as the top policy concern,
despite the moderation in December’s manufacturing PMI reading. We expect
Beijing to continue to relying on quantitative tightening measures to curb
inflation and counter the impact of QE2, while modest interest rate hikes are
also needed to anchor inflation expectations in the coming months."
The HSBC China Report on Manufacturing is based on data compiled
from monthly replies to questionnaires sent to purchasing executives in over 400
Japan: December data pointed to another deterioration in Japanese
manufacturing sector operating conditions, although the rate of contraction
eased to the weakest in three months. This primarily reflected slower declines
in output, total new business and employment. On the prices front, input cost
inflation quickened to the fastest since May. However, output prices continued
to fall amid strong competition for new work.
Manufacturing output in Japan
fell further in December, albeit at the slowest rate in the three months of
continuous decline. Where a fall in output was signalled, respondents widely
attributed this to falling new business.
Overall new work fell solidly in December, as
panellists continued to report underlying demand weakness. However, the pace of
reduction eased to the slowest since September. In contrast, the rate of decline
in new export business quickened to the fastest in twenty months. Anecdotal
evidence suggested that reduced export sales reflected sluggish demand from
Spare capacity remained evident in December,
with backlogs of work falling for the sixth month in succession. As a result,
firms continued to reduce staff levels, albeit at only a marginal rate. Lower
personnel numbers reflected employee retirements.
Slower lead times were
signalled in the latest survey period, with panellists attributing this to
supply shortages at vendors. However, the rate at which supplier performance
deteriorated was only slight, as firms continued to reduce their purchasing in
line with falling production requirements. That said, the rate of decline in
buying activity eased since November.
Average input costs faced by Japanese
manufacturing firms rose markedly in December, with the rate of inflation
quickening to a seven-month high. Even so, the latest increase was slower than
the long-run series average. Panellists cited higher raw material prices as the
key driver of inflation, with cotton, petroleum, rare metals and steel mentioned
Despite a sustained rise in input costs,
manufacturers continued to reduce their output prices in December. This
primarily reflected strong competition for new business. There were also reports
of client requests for lower prices. The latest decrease stretches the current
period of decline to more than two years.
Commenting on the Japanese Manufacturing
PMI survey data, Alex Hamilton, economist at Markit and author of the report
said: "Japan’s manufacturing sector
continued to contract in December, bringing to a close a year of mixed fortunes.
Output grew robustly in H1 2010 before losing steam and contracting towards
year-end. Manufacturers remained hesitant with regards to hiring, as underlying
demand weakness and spare capacity persisted in December. On the prices front,
robust cost inflation, coupled with continued output price discounting, will
likely place added pressure on firms’ operating margins heading into 2011."
The Markit/JMMA Japan Manufacturing
PMI is based on data compiled from monthly replies to questionnaires sent to
purchasing executives in over 400 industrial companies.