Chinese manufacturing sector operating conditions continued to strengthen at the start of the final quarter, with the rate of improvement quickening to the fastest since April. The headline seasonally adjusted HSBC China Manufacturing Purchasing Managers’ Index (PMI) climbed from 52.9 to 54.8 in October, representing one of the largest month-on-month rises in the PMI since the start of the series in April 2004.
Manufacturing output growth surged in October. The latest increase, which extends the current period of expansion to three months, was the fastest since January. Where a rise in production was signaled, respondents commonly linked growth to higher intakes of new business.
Overall new business received by Chinese manufacturing firms rose sharply in October, with the pace of expansion reaching a six-month high. However, a faster uptick in total new work relative to new export orders, which increased only modestly, suggested that total new business growth was centered on the domestic market in October.
Backlogs of work rose for the fourth month running in October, although the rate of accumulation was only modest. Anecdotal evidence suggested that outstanding business growth reflected strong gains in new work.
Average input costs rose considerably in October, and at the fastest rate since July 2008. The PMI input prices measure has risen more than thirty-one points since July, highlighting the rapid extent which inflationary pressures have built within the sector. Prices paid for coal, cotton, grain and steel were all reported as having risen since September. Higher cost burdens were also reflective of attempts to meet government emission targets, state restrictions on electricity usage and, in some cases, the rising price of global commodity futures.
Output prices set by Chinese manufacturing firms rose further in October, with the rate of inflation hitting a 27-month high. The latest increase was the third in as many months, and faster than the long-run trend. Factory gate price inflation predominantly reflected the need to protect operating margins in the face of rising input costs.
Commenting on the China Manufacturing PMI survey, Hongbin Qu, chief economist for China and co-head of Asian Economic Research at HSBC, said: “Another upbeat reading for the HSBC China Manufacturing PMI suggests the strong growth momentum in domestic demand to warrant around 9 percent GDP growth in 4Q, despite the still soft increase in new exports orders. The jump in output prices reflects higher input costs amidst strong demand, which also heralds a higher CPI likely to reach its cyclical peak in October.”
