China’s Manufacturing PMI Backs Off While Services Plow Ahead

China's manufacturing PMI in March was lower at 51.9, down from 52.6 in February. It continues to reside above the January level of 50.1. The table offers a look at 12-month, 6-month and 3-month averages; it also looks at point-to-point changes over 3 months, 6 months and 12 months. The momentum changes show that the headline of the index is higher over 12 months, higher over 6 months and higher over 3 months. The momentum changes are simple period-to-period changes; the table shows the largest increase in the manufacturing PMI by far is over 3 months gaining 4.9 points accounting for more than all the increase over 6 months and 12 months. The manufacturing PMI ranked on data back to 2005, presented as a percentile, is at a 67.7 percentile standing which places that reading just into the upper one-third of its range over this period.

The report shows a number of cross-currents, but mostly of a minor variety. For example, in March almost all the categories are weaker than they were in February, but the March values are almost all higher than they were in January. This marks February as a strong month more than it marks March as a weak month.

Trends on averages Data on averages over 3 months, 6 months, and 12 months show that there are month-to-month increases across most categories sequentially. The three-month averages compared to six-month averages show all categories are higher. Comparing 6-month averages to 12-month averages, all the categories are higher except employment that is slightly lower. Comparing 12-month averages to the 12-month average of 1 year ago, most of the categories are weaker; the exception is the ‘stocks of finished goods’ metric that is slightly higher on this average.

Period-to-period changes Applying the same process to simple changes, over three months the only category that is weaker is input prices. Looking at the six-month change, again, input prices are the only weaker category and the same is true looking at 12-month changes. China is showing expansion in all the activity categories compared to some weakness in input prices from 12-months to 6-months to 3-months.

All evaluation methods show solid results Setting aside the weaker readings in March compared to February, the period average momentum changes show substantial firmness or strength indicated by changes. If we evaluate the same metrics on their average level changes, we get roughly the same interpretation. When we're evaluating all the components on a timeline back to 2005, we find the queue standings of delivery times, order backlogs, and the stocks of finished goods all have standings in their 80th percentiles. Imports and output have standings in their 70th percentiles. The new orders metric is on the threshold of a 70th percentile standing at 69.1. Purchases of inputs is right at a 69.1 standing as well. Only input prices have a standing below their midpoint (below 50) since 2005. That’s impressive.

But are the Chinese metrics really that impressive? On balance, Chinese showing a great deal of positive momentum and strength compared to where its PMI indexes have been in the past; however, a lot of this also appears to be illusory strength. What I mean by that is that in March the strongest category is output with a 54.6 reading; that's not a particularly strong raw diffusion index – and it’s the strongest one of the bunch. Its ranking is strong/high when we look at changes over various periods or when we evaluate its level compared to a time span since 2005- but this period has been a difficult time for the Chinese economy. The output rating of 54.6 in March has a 70th percentile standing; however, the delivery speed reading up at a 50.8 reading which is barely above 50 - barely above the break even for increasing or declining - has an 81.6 percentile standing! How could such a weak diffusion reading have such a high percentile standing? The answer is a legacy of weakness that makes moderate reading appear strong. China has a number of weak-to-moderate readings for March. The PMI components that wind up having strong momentum and strong readings from compared to their recent past are simply reading with weak historic baselines.

Component strength Looking at PMI levels, there are 4 of 11 readings in March that are below 50 - and ‘50’ is the diffusion value that is the dividing line between increasing or decreasing. So 4 of 11 readings have PMI diffusion values so low that they point to declines in those categories; yet, these four categories average a standing at the 73.8 percentile. There are another four components that have readings between 50 and 50.9 indicating very moderate increases in the underlying series. These moderately firm PMI readings have lower average standings than their weaker diffusion index counterpart at an average percentile standing of 62.3%. The only reading at 51 is the manufacturing PMI headline with a 67.7 percentile standing. There are no readings at 52. At 53, there are two readings: one for new orders and one for purchases of inputs; they have an average standing at the 69.1 percentile. Finally, there's output with the highest reading overall at 54.6 that has the 70th percentile standing.

China recovers On balance, you get a picture of the Chinese economy that is recovering. Firm rank standings that are not well orders with respect to the raw diffusion levels are reported, but that is not necessarily a problem; it’s a ‘feature’ of the data. Different components have different tendencies and differing variabilities. The most volatile component in the U.S. ISM manufacturing is ‘prices’ and the same is true for this Chinese manufacturing index; input prices are more volatile than any other component – and by a large margin.

A legacy of COVID weakness China was hit hard by COVID and then for a long time it ran a zero COVID policy that caused various sorts of rolling recessions to cascade across the economy and that held back a lot of these aggregate measures of activity. Now China is beginning to come back on stream; so it's comparisons with history are going to be strong but still its history has been relatively weak. This creates some degree of paradox and looking at the normal metrics to try to evaluate how China is doing. Nonetheless China is coming back to life, but it's coming back to life at a difficult time for the global economy. On one hand, the strength in China could help to bolster the global economy and that's good. On the other hand, the global economy is weak and that's going to hold China back because there's going to be weak demand in the rest of the world.

The road ahead Looking ahead, there are still risks. The ongoing war between Russia and Ukraine is a negative geopolitical factor. In addition to this, there is the high inflation that has emerged; it's still being fought by central banks in the West causing interest rates to be higher than they've been and on a rising gradient. The new risk on the block is concern over banking problems and, of course, China has state sponsored banks and it's much harder to know exactly where they stand. Chinese banks have already weathered a property market bubble. The issue of banking problems and vulnerabilities in the U.S. and in Europe have become problems. We must continue to take the threat to the banking system as something that's serious and that could potentially be another negative in the outlook for the period ahead. But China is only on the periphery of this storm.