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a weekly chronicle of the Chinese economy

Phat dragon # 177

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are

reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

The flash estimate of the HSBC manufacturing PMI for August

shocked most observers by rising to 50.1 from 47.7 in July. Thisrelease follows the promising official data for the month of July

that Phat Dragon covered in recent editions of this chronicle.In reviewing the previous release of this survey, Phat Dragon

noted that the forward looking aspects of the detail improved,

despite the decline in the headline reading, with the fall awayin finished goods inventories a development of some moment.

Even so, the new orders to inventories ratio was still well belowunity, which tempered expectations of a major improvement. So

the favourable direction of change was not a surprise it wasthe scale of the gain that was not anticipated.

In this regard it is worth noting that the large bounce in theprivate survey merely brings it into line with the official PMI

produced by the NBS. The official survey had consistentlyindicated that orders were firmer and inventories were

less excessive than the state of play as described by therespondents to the HSBC survey. The starkly different

perceptions of the finished goods inventory position in the twosurveys was a major point of frustration from an analytical point

of view. Indeed, as Phat Dragons main interest in the various

monthly business surveys is in the information they provide onthe state of the inventory cycle, when they are so far out of

accord with each other, their combined and individual utilityboth decline significantly.

The PMI surveys are just two of the many sources that PhatDragon draws upon to assess the state of the inventory cyclein manufacturing. Various industry associations provide valuable

additional information, and there is also an official series on

industrial inventories by sector to ponder. Phat Dragonsfavourite measures come from the industry associations of the

bellwether steel and heavy machinery sectors. The situationin steel moved favourably in the most recent update, with the

growth of sales accelerating and the growth in inventoriesdecelerating: an ideal situation for a short term bounce in

production. In heavy machinery, conditions are not as obviously

favourable, but the state of play in yellow goods is muchimproved on this time a year ago. Looking specifically at

excavators, Phat Dragon estimates that finished units on handwere equivalent to 1.71 months of current absorption rates as

of June, down from 1.84 months a year ago. Furthermore, withsales accelerating to 8.0%yr in the month of July, when output

and inventory information are made available, it is extremelylikely that the inventory to sales ratio will improve further.

Phat Dragon has noted previously that within heavy industry,basic materials producers are running leaner inventory positions

than downstream machinery sectors. This is in large part dueto the relative strength of the construction and equipment

investment cycles, with the latter a clear laggard at present.This divergence is also evident within the basic materials space,

most visibly in the outperformance of long versus flat steel

products. Other sectoral developments worthy of mentionare the downward trend in the growth of inventories in non-

ferrous metals smelting, rubber and plastics, paper making andmetal fabrication. Sectors moving the other way include autos,

furniture, textiles and ICT. The outward orientation of theselatter three industries is consistent with the decline in the new

export orders reading in the flash PMI, which was the lone majorsub-index to go against the grain in the August update.

23 August 2013

Westpac Institutional Banking Group Economic Research economics@westpac.com.au www.westpac.com.au

Supply demand imbalance in excavators

-20

-10

0

10

20

30

-3

-2

-1

0

1

2

3

2006 2007 2008 2009 2010 2011 2012 2013

unitsMonths ofsales

Months of sales

Number of machines

Sources: CEIC, Westpac Economics.Year to June gap between sales and

production plus net imports, scaled byaverage monthly sales in equivalent period.

First half of the calendar

year specified.

Inventories rising

Inventories falling

Stats of the week: China is home to 56 officiallyrecognized ethnic groups, 10 of whom have more than 5million members.

Steel inventory cycle: April 12 to Jun 13

-30

-15

0

15

30

45

60

0 3 6 9 12 15

inventories%yr

Sales%yr

May-

2012

Jul-

2012

Aug-

2012

Oct-

2012

Apr-

2012

Sep-

2012

Mar-

2013

Jan-

2013

Apr-

2013May-

2013

Jun-

2013Dec-

2012

4042444648505254

4042444648505254

indexindex

Sources: CEIC , Markit * Seasonally adjusted by Westpac Economics.

Finished goods inventories

Manufacturing: stocks and orders

35

40

45

50

55

60

65

35

40

45

50

55

60

65

J an-05 J an-07 J an-09 J an-11 J an-13

NBS* HSBCNew Orders

Chinese industrial inventories

-30

-15

0

15

30

45

60

75

-30

-15

0

15

30

45

60

75

J an-04 J ul-05 J an-07 J ul-08 J an-10 J ul-11 J an-13

%yr%yr

IT and telco

Total

Ferrous metals

Rubber and plastic

Textiles

Sources: CEIC, Westpac Economics. 3mma.

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