Industrial recovery cools off in December from November's fevered pitch

China’s industrial sector continued to recover in December though easing to a softer pace, according to a business survey released today.

The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI), which surveys small and medium-size enterprises (SMEs) and export-oriented companies located in eastern coastal regions, fell to 53.0 from November’s 54.9, the highest reading since November 2010.

The decline is more significant than the December moderation of the official manufacturing PMI in November from 52.1 to 51.9, as SMEs may be suffering from a tighter electricity supply in some southern China provinces.

December’s fall in the Caixin manufacturing PMI was broadly based but led mainly by the new orders sub-index, which dropped significantly to 54.6 in December from 58.3 in November.

“Firms reported a slower but still marked increase in overall new orders, partly due to weaker growth of new export sales," according to the Caixin PMI report.

“The overseas pandemic situation remains uncertain, but demand for China’s exports is still steadily increasing as the sub-index for new export orders stayed in positive territory for the fifth straight month”, said Wang Zhe, senior economist at Caixin Insight Group.

The private sector survey also showed input prices rose sharply — at the fastest pace since December 2017 — as certain commodity prices continued to climb and the price of industrial metals rose significantly.

Earlier, the official PMI survey showed almost half the companies surveyed reported higher pressure due to the increasing price of materials — the highest in two years. Small businesses bore more of the brunt of rising costs.

Burdened by much higher input prices, Chinese factories laid off more workers than they hired for the first time in four months, although the decline was moderate.

The employment sub-index dropped into sub-50 contractionary territory in December, to 49.9 from 51.3 in November, suggesting labor markets have declined sequentially.

“We need to pay attention to the mounting pressure on costs brought by the increase in raw material prices and its adverse impact on employment, which is particularly important for the design of the exit from stimulus policies implemented during the pandemic," Wang said.

Overall, macro economy analysts remained buoyant about China’s economic recovery. 

"Despite the lower PMIs, China’s recovery remains on track for Beijing to normalize its policy stance in 2021, although the normalization should be moderate and gradual," a Nomura official said.

Real GDP growth will likely reach 5.7 percent year on year for the fourth quarter of 2020, up from 4.9 percent in the third quarter. GDP growth will surge to 19.0 percent year on year in the first quarter of 2021, Nomura forecasts.

“We expect the economic recovery in the post-pandemic era to continue for several months, and macroeconomic indicators will be stronger in the next six months when taking into account the low bases in the first half of 2020," Wang said.