Markit Economic Research Embargoed until: 01:45 (UK time) 24 March 2014

China
Factories report steepening downturn in March

Manufacturing PMI drops further below 50; adds to evidence of GDP slowdown in Q1 Falling orders point to ongoing weak domestic demand, but relief as exports return to growth Governments 7.5% 2014 grow th target at risk

TM

Economic growth and the PMI

China GDP, annual % change 13 HSBC Manufacturing PMI 60

GDP
11

PMI

58 56 54

52 50

Input prices and output charges fall sharply

7

Business conditions in Chinas manufacturing economy deteriorated at the fastest rate since last July in March, according to the flash PMI produced by Markit for HSBC. The deterioration points to a slowdown in GDP growth in the first quarter and raises the spectre of the economy failing to meet the governments 7.5% growth target in 2014. At 48.1, down from 48.5 in February, the PMI fell below the 50.0 no change level for a third month running in March. Output and new orders showed the largest falls since September 2012 and July 2013 respectively. A further slight shortening of supplier delivery times (a disappointing sign of suppliers being less busy), as well as further modest falls in both employment and inventories, also helped keep the PMI below 50. However, it was not all bad news. The rate of job losses eased to the weakest seen over the past six months, the rate of inventory reduction slowed and, perhaps most encouraging of all, new export orders rose for the first time in four months, staging the largest increase (albeit by a small margin) since November 2012. The stronger rate of decline of overall orders in the face of the export gain suggests that domestic demand remains the key drag on the economy.

48 46

44 42

3 2008

40 2009 2010 2011 2012 2013 2014 Sources: Markit, Ecow in.

Order books
HSBC (Markit) Manufacturing PMI
65 60

55 50 45 40

35 30 Jan 05

New export orders New orders (all)

Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14

Source: Markit.

Sources: Markit, NBS (via Ecowin).

Suppliers delivery times and inflation

CPI, annual % change 12 PMI Delivery Times Index (inverted) 40 Delivery times indicating sellers' market 42 8 44 46 4 48 50 0 Consumer price inflation HSBC/Markit Manufacturing PMI Suppliers' Delivery Times Index -4 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 Delivery times indicating b uyers' market 52 54 56

7.5% growth target under threat

The accelerating rate of decline in production and new orders, the latter hinting at ongoing production weakness in April, therefore raises the possibility that economic growth slowed in the first quarter and could weaken further in the second quarter.

Sources: Markit, NBS (via Ecowin).

The data are consistent with annual GDP growth falling to 7.5% at most in the first quarter, having already dipped to 7.7% in the fourth quarter of last year. At 48.7, the average reading of the manufacturing PMI in the first quarter compares with 50.7 in the fourth quarter, and is the lowest average since the third quarter of 2012. The weak first quarter and sluggish momentum moving into the second quarter means the governments modest 7.5% growth target for the year may already be looking optimistic, and suggests a heightened need for further measures to boost domestic demand.

Input and output prices

HSBC (Markit) Manufacturing PMI
90 80 70 60 50 40 30 20 10 Jan 05

Output prices Input prices

Jan 06

Jan 07

Jan 08

Jan 09

Jan 10

Jan 11

Jan 12

Jan 13

Jan 14

Source: Markit.

Input prices and output charges fall sharply

With the economy slowing, manufacturers reported that suppliers delivery times shortened slightly again in March, often reflecting suppliers being less busy. Of all the survey indices, the Suppliers Delivery Times Index is the best advance indication of producer and consumer price trends, and the shortening of lead times is consistent with consumer price inflation cooling further from the 13-month low of 2.0% seen in February. With suppliers increasingly competing on price to win customers, manufacturers input costs fell at the fastest rate since August 2012, dropping for a third consecutive month. Lower costs and intense competition meanwhile caused manufacturers to lower their own prices in many cases, which resulted in the largest drop in average factory gate prices since June 2012. The data therefore indicate that the annual rate of producer price inflation will deteriorate further from the 2.0% rate of decline seen in February.

Operating capacity
HSBC (Markit) Manufacturing PMI
58

54

50

46

Employment Backlogs of work

42 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14

Source: Markit.

Employment still falling

Finally, factories cut their headcounts for the eleventh time in the past 12 months, albeit with the rate of job shedding easing to the weakest seen in six months. But a slight fall in backlogs of work for a second successive month suggests that factories may remain under pressure in April to reduce capacity in line with the weakening order book situation.

Chris Williamson
Chief Economist, Markit
Tel: +44 207 260 2329 Email: chris.williamson@markit.com Click here for more PMI and economic commentary. For further information, please visit www.markit.com