China manufacturing output improved again in March

At 57.0, the headline HSBC China Manufacturing Purchasing Managers’ Index rose to its third-highest level in the survey history during March, pointing to a marked improvement of operating conditions in the Chinese manufacturing economy. For the first quarter of 2010 as a whole, overall growth of the sector was the most marked since the start of the series in April 2004.

Manufacturing output rose again in March. The rate of expansion was substantial, and slightly faster than in the previous month. Those respondents that reported an increase in production often linked growth to buoyant client demand.

The level of new business continued to rise in March, increasing at the third-fastest rate in the series history. New business growth has now been maintained for twelve months in succession. Where an increase in new order intakes was signaled, respondents generally attributed this to greater demand from both external and domestic sources. Export sales rose at a near-record pace in the final month of Q1 2010, largely as a result of ongoing economic recoveries in a number of China’s key trading partners.

Backlogs were accumulated at a marked rate in March as manufacturers continued to find it increasingly difficult to complete both existing and new contracts. Meanwhile, staffing levels increased at a solid rate that was the fastest in three months. Business expansion plans and higher output requirements were cited as having supported employment growth.

Average input costs rose substantially in March. Anecdotal evidence suggested that inflation reflected rising prices for a range of raw materials, with oil and steel mentioned in particular. Subsequently, manufacturers reported raising their output prices in an attempt to maintain margins. However, increased competition meant that charges rose to a lesser extent than cost burdens, and at the slowest rate in five months.

Purchasing activity rose again in March. Although still marked, the rate of expansion was the weakest since July last year. Nonetheless, average vendor performance deteriorated at the fastest rate in 19 months, partly reflecting transportation difficulties. Increased purchasing meant that stocks were accumulated for the fourth consecutive month.

Commenting on the China Manufacturing PMI survey, Hongbin Qu, chief economist for China and co-head of Asian economic research at HSBC, said: “Another substantially high headline manufacturing PMI reading, combined with strong growth of exports, points to an acceleration in industrial production and likely over 11 percent year-over-year GDP growth in Q1. With inflation pressures rapidly accumulating, this increases the risk of interest rate hikes in the coming months.”