Chinese manufacturing sector close to recession

China's manufacturing sector is nearing a technical recession with nationwide manufacturing activity standing at 41.2 in December compared to a low of 40.9 in November as the global economic slowdown and recession in the US, UK, Japan and many EU countries takes its toll on Chinese manufacturing units and exports.

According to brokerage and investment group CLSA's China Purchasing Managers Index (PMI), which measures manufacturing activity nationwide, fell to a survey low of 40.9. Production and new order volumes declined at series-record rates and average input prices fell at the sharpest rate in the survey history.

CLSA said that the December survey represented the fifth contraction in a row, showing the direction the world's fourth-largest economy is taking although the World Bank has said that China's economic growth will grow by 7.5 per cent - a 19-year low.

This growth figure is however not in the same lines as many global economists who predict a lower growth for China at approx 6 to 7 per cent.

Last month China's industrial output growth dropped for the fifth straight month, to 5.4 per cent year-on-year in November – the slowest in nine years - the National Bureau of Statistics (NBS) said. (See: China industrial output growth hits a 9-year low in November)

The Chinese government then took the unprecedented step of cutting interest rates for the fifth time in three months amid fears that economic growth may fall significantly in the fourth quarter. (See: China cuts interest rate fifth time in three months)

China's exports declined 2.2 per cent year-on-year to $115 billion in November - the first monthly fall since June 2001, according to China's General Administration of Customs (See: China's exports down 2.2 per cent in November)

November exports were down 10.4 per cent month-on-month, reflecting the slump in US demand after the financial bubble burst.

Production at firms operating in the Chinese manufacturing economy contracted at the sharpest rate in the survey history during November. Firms generally attributed the latest fall to lower new workloads, reflecting fears of a protracted economic downturn and uncertainty in financial markets.

The level of new business received by Chinese manufacturers fell for the fourth month in succession during the month. Anecdotal evidence indicated that the deepening financial crisis and adverse demand conditions had significantly contributed to November's survey low reading.

In line with new business, export order receipts declined at the sharpest rate and companies widely commented that the bleak economic environment and poor demand were principal reasons contributing to the latest fall.

Declining new order volumes prompted firms to clear existing contracts at the fastest rate in the survey history in November. Levels of work-in-hand (but not yet completed) have now fallen in each of the past four months.

In November, staffing levels at firms in the Chinese manufacturing sector fell at the steepest pace and companies continued to reduce their labour overheads by halting recruitment and shedding jobs.

Average input costs fell at a survey-record pace in November, reflecting stagnant market conditions and fears of a prolonged economic downturn. Data indicated that output charges fell at a series-record rate and for the third month in succession during November. Survey responses linked the latest decrease to uncertain economic conditions and lower input costs.

Commenting on the China Manufacturing PMI survey, Eric Fishwick, Head of Economic Research at CLSA said, ''Another grim month for China manufacturing and the first in which the weakness in overseas demand overtook what, until now, has been mainly a domestic slowdown. Export orders will weaken further and we expect further cuts in production and employment. Costs are plummeting but the benefit to margins is being offset by output price cuts as businesses try to protect market share.''