• PMI posts fourteen-month high of 53.0 in July.
• Acceleration of output growth.
• Growth of employment sharpest for sixteen months.

July’s survey highlighted a further improvement in Chinese manufacturing operating conditions. The CLSA China Purchasing Managers’ Index TM (PMITM) – a composite indicator designed to provide a singlefigure snap-shot of the health of the manufacturing sector – edged up from June’s 52.9, to 53.0, its highest level since May 2005.

Commenting on the survey, Eric Fishwick, Deputy Chief Economist at CLSA said:

"The PMI is signalling another modest acceleration, exactly what the authorities don’t want to see given the already excessive pace of growth. Further austerity measures should be expected with the inevitable result that finally Beijing will tighten too far and push the economy into a slowdown – no central bank ever tightens with the intention of causing recession but this is almost always the result. Though the margin squeeze is clearly continuing, both input and output price indices dipped this month. For the fourth month both input and output price indices were above the 50 breakeven line signaling that businessmen have no choice but to try and pass input price rises on. The era of China ‘exporting deflation’ is long over."

The PMI was supported by further growth of output and new orders during July. Production rose for an eighth consecutive month, with the rate of expansion accelerating to a fourteen-month high. A solid rise in incoming new business was also recorded, which reflected growth of sales to both domestic and export markets.

Employment rose for a fourth successive month in July and, although still only modest, the rate of hiring picked up to a sixteen-month high. Despite the boost to operating capacity resulting from increased staffing levels, firms recorded further growth of backlogs of work, with the latest rise the most marked for ten months.

In line with rising production requirements, firms stepped up their purchasing activity again in July. The rate of growth of input buying remained robust, placing further pressure on suppliers of raw materials. Consequently, lead-times lengthened for the sixth month running.

Latest data showed that input price inflation in the Chinese manufacturing economy eased sharply from the twenty-one month high recorded in June. Nevertheless, a steep rise in costs was still posted, reflecting higher prices paid for many raw materials – especially oil-related products.

In a bid to mitigate the effect of increased purchase costs, firms raised their prices charged for finished goods for a fourth successive month in July. Although the rate of output price inflation was down from June’s survey high, it remained robust. Anecdotal evidence suggested that pricing power was aided by strong market demand.

July’s data indicated rises in both pre- and post-production stocks. Inventories of purchases increased at the strongest rate in the survey’s twenty-eight month history, reflecting strategic stock-building at a number of manufacturers. Warehouse inventories expanded only marginally, as efforts to boost stocks of finished goods at some firms were broadly offset by the need to meet increased demand.