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June PMIs show China slowdown continues, India pushes on

China's PMI fell to 48.2 in June, the lowest since November 2011, as the slowdown in its economy continues. The HSBC PMI survey showed that output, new orders and employment are continuing to fall, with the seasonally-adjusted index down marginally from the 48.4 seen in May.

Qu Hongbin, HSBC Chief Economist, China, commented: "It's all about growth and employment. As external demand has weakened and domestic demand hasn't shown a meaningful improvement in response to earlier easing measures, growth is likely to be on track for further slowdown, hence weighing on the jobs market.

He added that he expects China to take more decisive action to stimulate growth in the coming months as inflation eases, saying: "Beijing has plenty of room and policy ammunition to avoid a hard landing."

Underlying the PMI figures is a lack of demand, both export and domestic, with total and foreign new orders falling at accelerated rates last month. New export orders dropped at the steepest rate in more than three years, with North America and Europe in particular ordering less. But the fall in overall new orders isn't fully reflected in manufacturing output, where the decline remained marginal, leading to the second largest increase in finished goods inventories since data were first compiled in April 2004.

HSBC China Manufacturing Purchasing Managers' Index from 2004 to June 2012

Source: Markit, HSBC

While China's manufacturing workforce shrank again last month – the fourth month running – the rate of decline was the weakest in three months.

June also saw a sharp decline in average costs for producers, partly because of the fall in the price of oil and some other commodities. Companies reduced their factory gate charges last month and the pace of output price discounting was the steepest in 42 months, with some manufacturers reporting that competitive pressures also contributed to their price drops.

Overall the PMI's for much of Asia paint a picture of slowing activity, with the figures for Taiwan, South Korea and Vietnam all falling. However Indonesia's PMI rose, from 48.1 in May to 50.2 in June.

India manufacturing growth remains resilient

In contrast India's manufacturing sector recorded improved output conditions in June, with the HSBC PMI at 55.0, marginally up on May's 54.8. Firms reported that improving quality and stronger demand led to higher order levels, with both output and employment levels expanding as a result. However the momentum for new orders, particularly exports, has slowed. Costs also rose, with both input and labour costs up, and manufacturers passing those costs on to their clients in increased output prices. All of which saw a sharp rise in inflation, the largest since last August, extending the inflationary period to 39 successive months.

Commenting on the India PMI, Leif Eskessen, chief economist for India & ASEAN at HSBC, said: "Activity in the manufacturing sector kept up the pace in June with output, and employment expanding at a faster pace. The latter helped slow the pace of growth in backlogs of work. New order growth decelerated slightly led by export orders while stock levels rose, suggesting a slight moderation in output growth going ahead. Input and output prices rose at a faster pace than in May, keeping inflation high by historical standards. In light of these numbers, the Reserve Bank of India does not have a strong case for further rate cuts, which could add to lingering inflation risks."