By: Dr. Mike Campbell

Figures released by the Chinese Federation of logistics and Purchasing (CFLP) from their Purchasing Manager’s Index (PMI) show that the sector has grown in August after four successive months of decline. The PMI value crept up from 50.7 in July to 50.9 for last month. A PMI value above 50 is indicative of growth, so the sector has not gone into contraction over the past five months; rather the rate of expansion has been steadily falling as demand for Chinese exports has weakened in importing markets (notably Europe and the USA).

However, with continuing weakness in the global recovery and a lot of nervousness in the markets, CFLP knows that Chinese manufacturing is not out of the woods yet. Despite the growth, CFLP said the sector still faced tough times ahead. Data for August reflects this caution; the new export index recorded a 2.1% decline in August, taking that index to 48.3 and reflecting a real contraction. "From the demand point of view, there are still many uncertainties. The fairly big drop in the new export order index showed that Chinese exports may weaken significantly in the future. Purchasing prices continued to rise in August, showing growing pressure on the corporate cost side" CFLP’s Zhang Liqun commented.

China is also being affected by higher costs for raw materials (which are frequently priced in Dollars) which squeeze margins on exported materials. Whilst nations such as Japan and Switzerland have seen their currencies strengthen against the Greenback, thereby making raw materials cheaper, China has kept the Yuan artificially low, largely tracking the Dollar, so it does not see this benefit.