January 2, 2012

Chinese Stock Market Expects More Weakness in China Manufacturing

The CFLP Manufacturing PMI rebounded to 50.3 in December after falling to 49.0 in November from 50.3 in October. The fall in November was particularly worrying as the month is normally a relatively strong seasonal month. On the other hand, December is normally a weaker month from a seasonal point of view and the rebound was therefore unexpected.


Sources: CFLP; Li & Fung; Plexus Asset Management.
Although the CFLP Manufacturing PMI is seasonally adjusted to some extent, it still displays a significant seasonal trend and I therefore adjust the series further.
Sources: CFLP; Li & Fung; Plexus Asset Management.
The meaningful contraction in my seasonally-adjusted PMI in November and the rebound in December is evident in the following graph.
Sources: CFLP; Li & Fung; Plexus Asset Management.
Imports were particularly weak since September this year as the much expected relative seasonal strength from September through end-November was absent as the Import PMI contracted. The Import PMI in December was 49.1 and still indicates continued contraction, but at a significantly slower rate.
Sources: CFLP; Li & Fung; Plexus Asset Management.
On a seasonally-adjusted basis the Import PMI jumped from 46.6 to 49.3.
Sources: CFLP; Li & Fung; Plexus Asset Management.
After the collapse in the New Export Orders PMI in November the contraction in new exports eased considerably in December.
Sources: CFLP; Li & Fung; Plexus Asset Management.
On a seasonally-adjusted basis the New Export Orders PMI surged 3.8 points in December to 48.8.
Sources: CFLP; Li & Fung; Plexus Asset Management.
In December China’s manufacturing sector reached a level where stocks were more easily managed given the levels of orders. The rate of contraction in stocks of major inputs in the manufacturing sector eased markedly.
Sources: CFLP; Li & Fung; Plexus Asset Management.
After the spike in November the rate of accumulation of stocks of finished goods slowed significantly with the Stocks Of Finished Goods PMI falling back to 50.6.
Sources: CFLP; Li & Fung; Plexus Asset Management.
Stocks continue to remain high relative to new orders, though (please note the reverse axis). The ratios of stocks of major inputs to new orders and stocks of finished goods to new orders continue to indicate sluggish growth in the manufacturing sector in January 2012.
Sources: CFLP; Li & Fung; Plexus Asset Management.
Sources: CFLP; Li & Fung; Plexus Asset Management.
But why did China’s manufacturing sector suddenly collapse in November and subsequently recovered in December? In my opinion it has little to do with overcapacity in China as most commentators argue. China’s economy, and especially the manufacturing sector, is interlinked with Japan’s economy – particularly the manufacturing sector as the comparison of the manufacturing PMIs since the start of 2011 indicates. The twin disaster in Japan had a severe impact on China’s manufacturing sector from March to May and in the ensuing period to September the PMIs of both countries moved in the same direction. In October and November China’s manufacturing PMI reflected the same trend as Japan’s PMI but displayed relative weakness.
Sources: CFLP; Li & Fung; Markit; Plexus Asset Management.
My guess is that the relative weakness can be attributed to the significant contraction in the Eurozone’s economy since August. The easing of the contraction in the Eurozone in November and December possibly explains the improvement in the manufacturing sectors in China and Japan in December.  In my opinion, this also explains the contra-seasonal movements in November and December.
Sources: CFLP; Li & Fung; Net Bridge; Plexus
Will China’s manufacturing sector continue the apparent recovery in January? I think that the manufacturing PMI will remain under pressure in January – not because of weakening economic fundamentals, though.  The impact of the preparations for the Chinese New Year celebrations that begin on 23 January and last until 28 January is noteworthy. Chinese people may take weeks of holiday from work to prepare for and celebrate the New Year. The celebrations last for a total of 15 days. In the past it had depressed the PMI of that month and I believe January will be no exception. Thereafter, the manufacturing PMI is likely to be heavily boosted by pent-up demand and return to normality.
At this stage the Chinese stock market does not believe the improved CFLP Manufacturing PMI for December and is anticipating a level of below 49.0 in January. 
Are Chinese stocks overcompensating for the New Year celebrations?

Sources: CFLP; Li & Fung; I-Net Bridge; Plexus Asset Management.

About The Author - Prieur du Plessis is chairman and founder of South African-based Plexus Asset Management, and he writes a blog at Investment Postcards from Cape Town. (EconMatters author archive here.)


The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

© EconMatters All Rights Reserved | Facebook | Twitter | Post Alert | Kindle