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China Manufacturing Contracted in Dec.; Fall in Orders Led by Soft Domestic Demand (FXI)

December 31, 2014 6:45 AM EST

Chinese manufacturers signaled a renewed deterioration in operating conditions at the end of 2014, with both output and new orders falling slightly on the month. In contrast, new export business continued to increase in December, and at a slightly quicker rate than in November. In response to lower total new orders, firms cut their workforce numbers again in December, albeit only slightly. On the prices front, both input prices and output charges fell at the sharpest rates in nine months.

After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index (PMI) – a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy – posted at 49.6 in December, down from 50.0 in November and the first deterioration in operating conditions since May. That said, the rate of deterioration was only marginal.

*** The preliminary reading was 49.5 for December.

The weaker PMI reading was partly a result of a renewed fall in new business volumes placed at Chinese manufacturers in December. Though only slight, it was the first reduction in new orders since April. Data suggested that the decline was largely driven by softer domestic demand, as new export work rose for the eighth month in a row and at a slightly quicker rate than in November.

As a result of lower overall new business, manufacturers cut production for the second successive month in December. That said, the rate of reduction was weaker than in November and only fractional.

Manufacturing employment in China declined again in December, thereby extending the current sequence of job shedding to 14 months. However, the rate of reduction eased to the weakest in five months. Lower staff numbers contributed to an increased amount of work-in-hand (but not yet completed) in December. Furthermore, the rate of accumulation quickened to a solid pace that was the strongest since March 2011.

Lower production requirements led to the first reduction in buying activity since April, albeit only slight. Stocks of purchases meanwhile fell for the fifth straight month, with a number of companies mentioning stocks had fallen in line with softer client demand.

Average input costs faced by Chinese goods producers fell for the fifth month in a row during December. Moreover, the rate of reduction accelerated to the sharpest since March.



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