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May 3, 2019

Fall in new export orders weighs on China’s factories

Factory activity in China last month rose at a softer pace than in March, with a fall in new export orders suggesting cooling overseas demand.

Factory activity in China last month rose at a softer pace than in March, with a fall in new export orders suggesting cooling overseas demand.

Even so, the latest reading from the Caixin China purchasing managers’ index (PMI) marked the second consecutive month of growth.

Output and total new work both rose slightly, though companies reported a marginal fall in new work from overseas. Buying activity meanwhile stabilised, but relatively subdued demand conditions led firms to remain reluctant to expand their inventories in April.

Prices data indicated that overall inflationary pressures softened at the start of the second quarter. Input costs and output charges both rose only marginally, with some linking lower selling prices to recent sales tax reforms.

And business confidence regarding the one-year outlook for production improved to an 11-month high.

The headline seasonally adjusted Purchasing Managers’ Index (PMI) – a single-figure snapshot of operating conditions in the manufacturing economy – edged down to 50.2 in April, from 50.8 in March.

Figures above the 50.0 point mark indicate growth in manufacturing activity – so although the rate of improvement was only slight, it nonetheless contrasts with the subdued trend seen at the turn of the year.

The latest data shows manufacturing output in China rose again in April. Though marginal, the upturn extended the current expansionary sequence to three months.

New orders followed a similar trend, and rose at a softer pace than seen in March. Data indicates that subdued sales largely stemmed from weaker foreign demand, as new export business fell for the second time in the past three months.

Companies signalled limited pressure on operating capacities at the start of the second quarter, as highlighted by the slowest increase in backlogs of work for three years. At the same time, efforts to contain costs and the non-replacement of voluntary leavers led to a slight fall in manufacturing workforce numbers.

Buying activity broadly stabilised following three-months of reduction. As a result, stocks of purchases were also broadly unchanged compared to the previous month. However, muted overall demand conditions meant manufacturing firms remained cautious regarding their inventories of finished items, which fell for the fourth month running.

Latest data showed an easing of pressure on supply chains across China’s manufacturing sector, as delivery times for inputs increased only marginally.

Average purchasing costs rose again in April, though the rate of inflation was only slight. Factory gate prices also increased at a weaker pace, with some firms citing that charges were impacted by recent sales tax reforms.

On a positive note, business confidence strengthened to its highest for nearly a year in April. Responding to a questionnaire, companies often linked positive forecasts to new product launches, planned company expansions and expectations that global demand conditions will improve.

Progress in trade talks between the US and China was thought to be behind the recovery of China’s manufacturing sector in March – but the latest results for April suggest these hopes may have been premature.

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