Manufacturing drives recovery on mainland

PUBLISHED : Wednesday, 02 May, 2012, 12:00am
UPDATED : Wednesday, 02 May, 2012, 12:00am

The mainland's official purchasing managers' index (PMI) recorded its fifth consecutive rise last month to its highest in 13 months, in fresh evidence that the nation is recovering from the current economic downturn, caused by credit tightening and slowing export growth.

The official PMI, a forward-looking gauge of manufacturing activities tracked by the National Bureau of Statistics (NBS), edged up to 53.3 last month from 53.1 in March. It has been on a consistent recovery course from a low of 49 in November.

Readings above 50 signal expansion, below 50 indicate contraction.

The rise in April's PMI was mainly driven by the manufacturing output sub-index, which rose to a 15-month high of 57.2 from 55.2 in March.

The official PMI followed last week's HSBC Flash PMI, the earliest indicator of industrial activity, which also showed signs the economy was improving.

However, HSBC Flash PMI's reading, of 49.1 for April, down from 48.3 in March, came in below 50 for the sixth straight month.

The HSBC PMI has been weaker than the official PMI in the current downturn because the former focuses more on small and medium-sized firms, which tend to be exporters and are worse hit by weak demand from developed nations, according to Lu Ting, an economist at Bank of America Merrill Lynch.

The NBS said that among the fastest growing sectors were: metals and minerals; electrical machinery; textiles and clothing; and paper and printing. Among the weakest were: carmaking; oil refining; production of the steel-smelting material coke; and metals smelting and processing.

According to Lu, the latest PMI data supports his belief that the mainland's economy bottomed out in the first quarter. He said the upturn was driven by: 'pro-growth' economic policies initiated earlier; re-stocking by manufacturers; and higher infrastructure investment as the dust settles after a high-level corruption scandal in the Ministry of Railways.

But he cautioned that the government was unlikely to provide any big economic stimulus. 'Beijing will continue its pro-growth policies, but ... any big stimulus is unlikely at this stage because that would raise prices of raw material imports and re-ignite inflation,' he wrote in a note.

He said chances of an interest rate cut were extremely low, although the banks' reserve ratio might be cut by a total of 50 basis points before the year end. Commercial banks are required to set aside over 20 per cent of their cash as reserves, which cannot be lent out. Adjusting this proportion is one of Beijing's preferred tools in regulating the money supply.

Although the overall PMI figure is on an uptrend, the NBS noted the divergent fortunes of companies of different sizes. Medium and large enterprises' PMI grew to 53.7 from 53.4, while small ones' dropped sharply to 49.1 from 50.9. Small enterprises have faced greater difficulties obtaining financing amid last year's credit tightening.

Citi said weak external demand would continue to be a drag.