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China November Caixin/Markit PMI shows continued growth in manufacturing sector, but at slower pace

The Caixin/Markit PMI indicated continued growth in China’s manufacturing sector, but the growth is losing momentum as the housing market is easing. The deterioration is likely to continue to for months and eventually the index might drop below 50, noted Nordea Bank in a research report. The Caixin/Markit PMI index dropped from its three-year high of 51.2 to 50.9 in November. This is marginally below consensus projection of 51.

This is in line with the view that the industrial improvement mostly came from the construction rebound in 2016. The sentiment in manufacturing sector is likely to decline in the months ahead because of the easing housing market. The PMI might drop below 50 sometime in 2017.

The subdued headline reading is in line with the sub-components. Both new orders and production output showed a slowdown, while export orders continued to shrink. Meanwhile, finished goods inventory began rising. So unless new orders improve, production would be required to be lowered, according to Nordea Bank.

However, a different picture was depicted by the official manufacturing PMI that rose to 51.7 from 51.2. The rebound in the headline index was driven by rise in new orders and fall in inventory. Taking the finished goods stocks into account, new domestic orders have not been this high in almost six years. This evidently underpins an additional growth in production.

The divergence between Caixin/Markit and the official PMI is due to the unequal position of state-owned enterprises as compared to private firms. The large-scaled infrastructure investments have mostly helped the public companies that are closely connected to the local governments that are responsible for several of the investment projects, noted Nordea Bank.

Moreover, continued growth in infrastructure investment and a deceleration in housing investment might adversely impact private companies as a larger share of private firms are in housing-related manufacturing. Therefore, the official PMI will mostly continue to come in better than the Caixin/Markit PMI, added Nordea Bank.

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