HSBC China PMI hits 16-month high of 55.1 in Aug

Published: 31 Aug 2009 18:32:20 PST

BEIJING, Sept 1 - HSBC's China Purchasing Managers' Index (PMI) rose in August to a 16-month high of 55.1, from 52.8 in July, as a jump in both output and new orders offered further evidence that the recovery in industry is gaining traction.

It was the fifth month in a row that the index, compiled by British research firm Markit and formerly sponsored by Hong Kong brokerage CLSA, has been above 50.

A reading above that level indicates expansion in the manufacturing sector; a figure below 50 indicates contraction.

Production surged, with the seasonally adjusted output sub-index leaping to 58.4 from 54.6 in July, a reading that has been surpassed only once in the history of the survey -- in the inaugural PMI report issued in April 2004.

Demand was strong both at home and abroad. The new orders sub-index rose to near a series high and the new export orders sub-index hit a 26-month high, implying external demand is stabilising or even starting to recover.

The rise in the index showed the strong momentum behind China's recovery, Qu Hongbin, chief China economist with HSBC in Hong Kong, said in a statement.

"With the construction works being implemented at full speed to generate demand for industrial goods, domestic demand has been substantially lifted," he said.

The strong result is likely to reinforce confidence in a recovery driven largely by the 4 trillion yuan ($585 billion) government stimulus programme and ultra-loose monetary policy.

Doubts about the solidity of the rebound emerged following July economic figures that, while strong, were less robust than expected, and were stoked by worries the central bank would pull hard on the reins of credit following record first-half lending.

"The Chinese manufacturing sector is likely to see further improvements in the coming months, adding fuel to overall growth recovery," said Qu.

The PMI has risen by nearly 13 index points since the start of the year and compares with a low of 40.9 hit in November 2008.

With activity picking up, input and output prices increased at their fastest pace in 13 and 12 months, respectively.

"Despite the pick up in both price indexes, core inflation should remain checked given that manufacturers can only pass a fraction of increased input costs to customers," said Qu.

A companion PMI, produced for the National Bureau of Statistics, rose to a 16-month high of 54.0 in August from 53.3 in July, its sixth straight month above the 50 mark. [ID:nPEK266738] [ID:nPEK62430]

Following is a breakdown of the PMI and the sub-index for output (seasonally adjusted):

Aug Jul Jun May Apr Mar Feb Overall PMI 55.1 52.8 51.8 51.2 50.1 44.8 45.1 Output 58.4 54.6 53.7 52.5 51.3 44.3 43.9

Markit, which surveys more than 400 firms, highlighted the following findings from the August poll:

-- Firms attributed the increase in output to a better business climate and gains in new business both at home and abroad, though domestic demand was still the main driver.

-- Firms' backlogs of work rose at the fastest rate since May 2005, as manufacturers struggled to increase capacity to catch up with strong gains in new business.

-- Inventories of finished goods fell for the second month in a row, as some firms met increased demand for their products by drawing down their stocks.

-- Firms increased their purchases of inputs for the fifth month in a row, expanding at the third-sharpest pace in the survey's history.

-- Employment rose for the third month in a row, and at the fastest pace since April 2008, due to rising production requirements and the intake of new graduates.

-- Input inflation surged, the second month that prices have increased after a nine-month decline, as raw materials such as steel cost more.

-- Output price inflation lagged that of inputs, as companies were unable to pass on all of their rising costs, though some firms said stronger demand had improved their pricing power.