China’s official manufacturing purchasing managers’ index (PMI) fell to 49 in December 2023, the lowest since June, according to data published by the National Bureau of Statistics on December 31st. However, the non‑official version, published by Caixin on January 2nd, improved to 50.8—a four‑month high. A reading above 50 indicates expansion.
The conflicting readings of data from the two sources reaffirm the need to observe and interpret data from both sources, rather than relying on a single one, in order to establish an accurate picture of the industrial sector. Divergence between official and non‑official PMI data (defined as the occurrence when the two indicators lie on different sides of the watershed line of 50) is not uncommon, accounting for 24.1% of all observations. Although the official PMI is usually credited with its larger sample size (with about 3,000 surveyed enterprises, compared with about 500 surveyed for the Caixin PMI) and lower volatility, in recent years it has not aligned more closely with China’s actual industrial performance as measured by month-on-month growth in industrial value‑added. The Caixin PMI has exhibited a closer correlation with industrial performance, and its stronger reading suggests that the true momentum in China’s industrial sector is stronger than implied by the official PMI.
The divergence suggests that the variation in performance among different sub-sectors is high. EIU believes that official PMI is more closely associated with the performance of producers of industrial materials—including steel, cement, refined oil and chemicals. This leaves them particularly vulnerable to the slowdown in fixed-asset investments. By contrast, the Caixin PMI is more representative of downstream enterprises that produce for the consumption and exports of final goods. Therefore, we believe that the current data trend reflects an economic reality characterised by stubbornly soft investment and improving final consumption.
Despite the divergence in headline readings, the two PMI series exhibit some structural similarities, which imply hidden weaknesses. The new export orders component in both series declined further in December, suggesting that a broad-based recovery in exports remains elusive, despite the emerging uptick in electronics trade. Another area common to both series is the decline in the employment component, which echoes our previous observation that the manufacturing sector is no longer capable of absorbing extra labour supply due partly to automation.
Industrial activity will firm up in the first half of 2024 following an anticipated rise in government‑led investments and an impending upturn in the business cycle. As a result, we expect the official PMI to rebound in early 2024. Overcapacity concerns will constrain investment in some sectors, but the underlying strengthening demand will prevent significant negative effects on production.
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