Headline PMI increases less than expected
The official PMI index for the manufacturing sector rose to 53.3 in April from 53.1 in March. This was a somewhat weaker increase than consensus expectations of 53.6. Underlying the increase in the headline index was an increase in the actual output index from 55.2 to 57.2, while new export orders rose from 51.9 to 52.2. Overall new orders came out a bit weaker in April, declining from 55.1 to 54.5, suggesting marginally weaker domestic demand. Overall, the official PMI report does not alter our expectations of a partial recovery in the rest of this year, bringing growth just above 8%.
Beware of seasonality
The increase in the headline PMI index was the fifth in a row, but there are good reasons not to get too optimistic. Even though the official PMI figure is supposedly seasonally adjusted, there are still clear seasonal patterns in the series. March and April have a very positive seasonal factor that more than explains the recent increases. In fact, applying an additional seasonal adjustment shows that the PMI index has declined in the previous three months and is now approaching the 50-level. Assuming a relatively constant seasonal pattern, the PMI index should have risen by 0.8 from March to April to rise in seasonally adjusted terms.
…and the bias towards large SOEs
Another reason to be careful when interpreting the official PMI figures is that small- and medium-sized enterprises (SMEs) are given a smaller weight in the official PMI than their share of the actual industrial output. This difference is visible when comparing the official PMI to the private HSBC PMI. Most SMEs have very limited access to credit given the bias of state-owned banks lending primarily to state-owned enterprises (SOEs). This often means that SMEs are more affected by an economic downturn.