China's factory output growth softens in December as input costs rise

Activity in China’s factories continued to expand in December but a rise in input costs slowed the pace of expansion of manufacturing output in the world’s second largest economy.

The Caixin/Markit Manufacturing Purchasing Managers' Index, a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing sector, edged down to 53 at the end of 2020, from 54.9 in November.

A reading above 50 indicates expansion, while one below indicates contraction. Analysts polled by Reuters had forecast the headline reading could slip to 54.8.

“The manufacturing PMI remained in expansionary territory as the post-epidemic economic recovery [in China] continued,” Wang Zhe, senior economist at Caixin Insight Group, said.

Both demand and supply in the manufacturing industry remained strong, while overseas demand also improved. Sub-indexes for output and total new orders edged lower from November levels, but remained in expansionary territory for the 10th and seventh consecutive months, respectively.

“The overseas pandemic situation remained uncertain, but demand for China’s exports improved, as the sub-index for new export orders stayed in positive territory for the fifth straight month,” the report said.

China was the first country to report the coronavirus in December 2019. However, strict containment measures helped Beijing to control the spread of the virus. The country has so far reported 87,150 cases of Covid-19 infections with 4,634 fatalities, according to Worldometer. Globally, the number of infections has risen to over 85 million with more than 1.85 million deaths.

China’s industrial sector has charted a swift recovery from the pandemic-induced slowdown. The International Monetary Fund expects the country's economy to expand 8.2 per cent in 2021 after slowing to about 1.9 per cent in 2020 – the weakest pace in over three decades. However, China’s economic recovery is much stronger than most major economies that are still struggling to contain the virus.

“In terms of the trend, we expect the economic recovery in the post-epidemic era to continue for several months, and macroeconomic indicators will be stronger in the next six months, taking into account the low bases in the first half of 2020,” Mr Zhe said.

Manufacturers in China, however, registered a “sharp and accelerated increase” in average input costs in December amid reports of greater raw material costs, particularly for metals. The rate of inflation was the steepest recorded for three years and led to a quicker rise in prices charged by manufacturers, according to the report.

Also, weighing on the headline index was a slower increase in production during December. Firms surveyed also reported a slower, but still marked, increase in overall new orders. Underlying data suggested that this was partly due to weaker growth of new export sales as demand from foreign clients expanded modestly.

“We need to pay attention to the mounting pressure on costs brought by the increase in raw material prices and its adverse impact on employment, which is particularly important for the design of the exit from stimulus policies implemented during the epidemic,” Mr Zhe said.