China's manufacturing sector is losing its momentum as it slows down to a Purchasing Manager's Index or PMI score of 50.9, slightly below the 51.0 projected growth for November. It dropped from 51.2 but remains above the critical line of 50 that separates expansion from contraction.
The Caixin/Markit PMI indicated that the sector continues to expand, but at a slower pace as the housing market is easing. With the housing boom already showing signs of fatigue, the manufacturing sector is likely to decline in the coming months, and the PMI might drop to below 50 sometime in 2017.
There was a slowdown in both new orders and production output, and export orders continued to shrink. Finished goods inventory, on the other hand, began rising. Given these circumstances, Nordea Bank noted that production will be required to be lowered until new orders improve.
However, different from the Caixin/Markit PMI, the official manufacturing PMI depicted a rise to 51.7 in November from the previous month's 51.2. This was said to be driven by rise in new orders and fall in inventory. If the finished goods stocks will be considered, this has been the highest new domestic orders in six years.
A sub-index for raw materials prices rose from 62.6 in October to 68.3 in November. Factories were also restocking as the inventories drop.
The difference in the Caixin/Markit and the official PMI is brought about by the unequal position of state-owned enterprises as compared to private firms. The Caixin/Markit focuses on smaller companies. And since large firms continued to perform better than the smaller firms, Caixin/Markit showed a drop in index.
"Overall, we judge that the economy has gained momentum in the short term but the quality of growth may have deteriorated, as evidenced by a further drop in the official PMI for small enterprises and a drop in the Caixin PMI," economists at Nomura said.
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