Why you shouldn’t get *too* excited about that China PMI | FT Alphaville

Why you shouldn’t get *too* excited about that China PMI

That 53.1 number from the official March manufacturing PMIs isn’t all that, when you consider the official numbers have a big seasonal skew.

To illustrate how big that skew is, here’s a chart that Markit Economics’ Alex Hamilton sent to us a few months ago [we just got a newer one] when we were asking him about divergences between the official and the HSBC/Markit Economics PMIs. It shows the official PMIs. Focus on how well March usually fares:

PMI seasonality - Markit

The official 2012 March reading of 53.1 is looking distinctly less impressive in this context, isn’t it?

However, even with seasonal adjustment lobbed on, the overall official PMI still makes it onto the positive side of the 50 line, as Societe Generale’s chart shows:

China official PMIs - March 2012 - seasonally adjusted - SocGen

Even more dramatically, SocGen interest rate strategist Christian Carrillo says that this latest official PMI figure appears to show relatively less “seasonality”, when the irregularity of China’s seasonal factors are accounted for. The divergence from 1 shows the degree of seasonality:

China official PMIs seasonal variation irregularity - SocGen

He explains it like this:

In Western countries, the seasonality is ‘regular’ in the sense that it happens every time at approximately the same time of the year (one exception is Easter, for example). In China and some other Asian countries the seasonality is ‘irregular’ because it’s related to the Lunar New Year so the usual seasonal adjustment methods do not work that well. The second chart uses a statistical filter to capture that irregularity. The fact you don’t see a big spike in the last datapoint means that the ‘seasonality’ this March was not especially large relative to the same month in previous years.

Meanwhile, SocGen’s China economist Wei Yao has some interesting observations about the components of the index (emphasis ours):

The details of the official report showed that all the five major sub-indices contributed positively, with new orders improving the most from 51 to 55.1. However, demand  from property sector and export related industries, including furniture and textile, continued to weaken. New export orders, increased to 51.9 in unadjusted terms but dipped below 50 in seasonally adjusted terms, reconfirming soft external demand. Inventory stocking of finished goods accelerated further, which was another indication of vulnerability.

New export orders is a closely watched sub-component of the index, for obvious reasons.

On balance though, Wei is pretty sanguine:

The official PMI report also showed sharp deceleration in activities of small enterprises, while large manufacturers dominated the gains. The headline PMI for small enterprises dropped 4.3 points to 50.9 in March, which probably implied a sub-50 reading in seasonally adjusted terms. This aspect was consistent with the deterioration in the HSBC manufacturing PMI. Hence, a fair assessment of these conflicting PMI reports, in our view, is that there are signs of stabilisation in China’s manufacturing sector, but weakness remains.

Maybe those efforts to encourage lending to SMEs are not going so well?

Related links:
China’s manufacturing gains mask exporters’ woes – Bloomberg