China manufacturing expands for a second month

If the latest purchasing managers' index (PMI) figures are to be believed, the worst might be over for China's manufacturing sector. The official PMI score for April, as produced by the China Federation of Logistics and Purchasing (CFLP), is 53.5, the fifth consecutive month of improvement and the second month that the score has been over 50, the number indicating that the sector is expanding.
 
The CFLP numbers are supported by CLSA, which conducts the other main PMI survey in China. For April, CLSA yesterday reported a PMI score of 50.1 -- lower than the official numbers but still within expansionary territory.
 
Last month (referring to activity in March) there was a large discrepancy between the two surveys. CFLP reported a score of 52.4, while the CLSA figure was only 44.8. Since the official score gives a greater weighting to large state-owned companies than the CLSA score, an explanation for the discrepancy could be that much of the recent boost in lending in China is for infrastructure projects, which will favour the public sector over the private.
 
It should be encouraging, though, that both sets of data point towards expansion, showing that the CFLP number for March was not just a fluke.
 
The improvement in the CFLP figure reflects the "normal seasonal improvements seen in past Aprils", Citi's China economist, Ken Peng, says in a research note. The PMI readings have increased in April in three of the past four years, by an average 1.2% -- almost exactly in line with the change from March to April this year. In these same three years, April was also the peak month, while May to July have seen subsequent declines. "Thus, observers should take monthly fluctuations with a grain of salt," says Peng.
 
"Nonetheless, it is encouraging that the large rebound in March was sustained and that activity is at least able to follow normal seasonal patterns," he says.

The markets did not take the data with a grain of salt, however. By the close of trading yesterday, the Hang Seng Index was up 5.5%, no doubt buoyed by the idea that China is already on the mend.

The new orders part of the index rose by two points. Out of the 20 industrial sectors questioned, 16 reported a score over 50. The biggest improvements were seen in garments, where new orders were up 8.8 points month-on-month, and in metals and smelting, where companies reported an 11.8 point increase in demand for non-metal minerals.

Orders for machinery were down by 4.1 points in the past month. This suggests that "new orders from infrastructure projects are taking a break", says Dong Tao, Credit Suisse's China economist, in a research report. "But given that these new orders are still high above the 60 mark, we are not concerned about this brief softening."

The recovery is primarily driven by domestic demand -- the level of export orders rose by 1.6 points to 49.1, suggesting that demand from abroad is still contracting. But if export orders continue to improve, as has been the case over the past five months, they could breach the 50 mark next month.

It is worth mentioning that although it looks as though the PMI is firmly back in the positive, and therefore growing, it is rebuilding itself from months of unprecedented declines. The new data suggests that the recovery could be sustainable, but it could take some time until China's manufacturing sector returns to its former glory.