China sees stable manufacturing growth but underlying conditions are weak

The Chinese manufacturing sector improved at the beginning at the beginning of the fourth quarter, so suggests the latest PMI surveys released on Friday. However breaking down into the figures, London-based consultancy, Capital Economics suggests that China is due for slower growth while small firms struggle.

The government's policy of reducing the availability of credit will likely slow growth across the manufacturing sector in the months ahead. The HSBC/Markit manufacturing PMI increased from 50.2 in September to 50.9 last month. Any number above 50 implies expansion.

The component of the HSBC/Markit manufacturing PMI covering finished goods inventories rose from 49.6 to 50.2 suggesting firms are accumulating unsold goods.

The official PMI rose from 51.1 to 51.4 beating expectations. The strength was confined to the output component which increased from 52.9 to 54.4, the largest increase since March. This contrasts with the forward-looking new orders component of the survey which fell from 52.8 to 52.5. This opens the largest gap between new orders and output seen since August 2012. Large state-owned firms continue to dominate, while small firms are performing poorly with the sub-index for small firms below 50.

New export orders in the HSBC/Markit survey rose from 50.7 to 51.3, while the same component from the official survey fell from 50.7 to 50.4. Economic activity is stronger than Capital Economics had previously thought but underlying conditions are weaker then the PMI figures suggest.

Qinwei Wang, China economist:

Looking ahead, government efforts to rein in credit growth mean that the manufacturing sector is likely to slow as we move into 2014. The People’s Bank has already tightened liquidity conditions since the second half of the month and, with concerns about the health of the labour market now easing, further efforts to rein in lending are likely.