China economy - Manufacturing regains momentum as the outlook improves

November 1st, 2012 From the Economist Intelligence Unit Event China's manufacturing activity contracted for the 12th consecutive month in October, according to HSBC's Purchasing Managers' Index (PMI), but the pace of decline was the slowest in eight months. Analysis Chinese manufacturers faced poorer conditions in October compared with the previous month, but an increase in the PMI suggests that the worst may be over. Adjusted for seasonality, the PMI reading rose from 47.9 in September to 49.5 in October, just below the 50-point mark dividing contraction from expansion. Stronger domestic demand, rather than a recovery in foreign orders, appeared to be the driving factor in the improvement. One-fifth of the survey respondents reported that new orders grew in October, but firms also said that demand from Europe and the US remained weak, with export orders declining for the sixth consecutive month. The lingering effects of the economic slowdown continued to squeeze workforces in October, although the effect was relatively modest, with 10% of survey respondents reporting staff reductions. Manufacturers reported rising import costs for the sixth month in a row, and for the first time in a year their output prices also increased. China's official PMI data series, which is skewed slightly more towards larger and state-owned manufacturers, gave a more optimistic assessment of overall conditions, posting a reading of 50.2, up from 49.8 in September and signalling a return to expansion. A pick-up in government infrastructure investment is likely to have boosted the index in October. Although the outlook is gradually improving for China's producers, there are still signs warning of bumps ahead on the road to recovery. One impediment to growth could come from delinquent bills, which mounted in the first three quarters of the year as manufacturers continued shipments despite customers' inability to pay. The Financial Times reported on October 30th that 66% of listed Chinese companies that had reported third-quarter results showed an increase in accounts receivable as a percentage of sales. In January-September unpaid bills owed to Baosteel and Jiangxi Copper, China's leading producers of steel and copper, have climbed by 52% and 66% respectively since the start of 2012.

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