• Activity across China’s manufacturing sector deteriorated at the fastest pace in nearly three years in February.
• The internal details of the report were almost universally weak, especially for smaller manufacturers.
• Activity levels across non-manufacturing sectors improved again, although at a slower pace than January.
• Separate China PMI reports from IHS Markit will be released in the coming days. They tend to attract more interest than the government figures.

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Conditions are getting worse, not better, across China manufacturing sector.

The government’s Manufacturing Purchasing Managers Index (PMI), released by China’s National Bureau of Statistics (NBS), slumped to 49.2 in seasonally adjusted terms, falling further from the 49.5 level reported in December.

It was the lowest level since February 2016, another period when concerns about the health of the Chinese economy were particularly acute.

This PMI measures perceived changes in activity levels across China’s manufacturing sector from one month to the next.

Anything above 50 signals that activity levels improved while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.

So at 49.2, the NBS measure suggests activity across the sector deteriorated at the fastest pace in nearly three years.

Markets had been expecting a steady reading of 49.5 in February.

Given the shifting timing of Lunar New Year celebrations in China, seeing the entire nation break for one week, caution towards the result is warranted even though the PMI is seasonally adjusted.

By size of manufacturer, it was a repeat of the result seen in January. Large manufacturers, often backed by the state, saw activity levels improve, masking some fairly terrible results for small and mid-sized firms.

The PMI for large firms rose by 0.2 points to 51.5. In contrast, the PMIs for small and medium-sized firms slumped to 46.9 and 45.3 respectively, down 0.3 and 2.0 points from a month earlier.

By activity subindex, production fell for the first time in over a year. Declines were also reported for staffing levels, inventories of raw and finished goods, work in hand and imports.

Prices for inputs grew for the first time in three months although selling prices continued to fall.

Looking ahead, the news was mixed with new domestic orders rebounding modestly after falling in the prior two months although new export orders, seen as a gauge on global demand, fell for an eighth consecutive month. The pace of decline is also the fastest in several years, impacted by not only the trade war with the United States but slowdown in the global economy.

However, despite the dire details of the report, optimism towards operating conditions looking 12 months ahead rose to the highest level since October 2018. The rollout of fiscal and monetary stimulus in prior months, or perhaps hopes of a trade breakthrough with the United States, may have been factors behind the result.

Outside of the manufacturing sector, the performance of China’s non-manufacturing sectors fared a little better with activity levels continuing to improve, albeit at a slower pace than a month earlier.

The NBS non-manufacturing PMI fell to 54.3 points, down from 54.7 in January.

The services PMI — now China’s largest sector — stood at 53.5 points last month, down 0.1 points from January.

“The service industry is generally stable,” the NBS said.

The construction sector PMI fell 1.7 points to 59.2, indicating that activity levels remained brisk, but not as strong as a month earlier.

The NBS said the timing of the Spring Festival holiday and inclement weather may have impacted the construction measure.

Combining the manufacturing and non-manufacturing PMIs together, the broader Composite PMI fell to 52.4 during the month, down from 53.2 in January.

“[This] indicates that the overall production and operational activities of Chinese enterprises continued to expand but, due to the influence of the Spring Festival, the pace of expansion slowed down compared with last month,” the NBS said.

Following the release of the Chinese government’s PMIs today, market attention will now turn to separate PMI reports from IHS Markit in the coming days.

They tend to focus more on small and medium-sized firms, often in the private sector. As such, and given these are private sector surveys, markets tend to pay more attention to them than the official PMI reports.

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