The Official Purchasing Managers’ Index (PMI) for China rose to 54.7 in October from 53.8 in September, a six-month high, exceeding the market forecast of 52.9. A companion PMI produced by Markit for HSBC has shown the China’s PMI figure rose from 52.9 in Sept. to 54.8 in Oct. PMI figure above 50 indicates expansion while below 50 indicates contraction. PMI of the third largest economy in Asia, India, maintained by HSBC Markit rose to 57.2 in October from 55.1 in September.
What is PMI?
Purchasing Managers Index is an important reading for manufacturing and the economy. It is extracted through surveying purchasing managers from a given country. They are so chosen to represent geographic and industry diversities. PMI is a composite index of five sub-indicators. The five sub-indicators are production level, new orders from customers, pace of supplier deliveries (faster or slower), inventories and employment level. For the USA, Institute for Supply Management (ISM) is responsible for maintaining PMI. PMI reports are given on monthly basis on first business day of a month.
PMI indicators for China and India suggest strong manufacturing growth for leading economic economies. With policy review due on November 2 for India, the strong indicator suggests another installment of rate rise by RBI. However, Duvvuri Subba Rao, the governor of RBI is known for surprising markets with his unexpected decisions regarding policy reviews. Though many are expecting another rate rise, it cannot be taken as granted. Large companies like L I C of India have delivered wage revision arrears in October and software companies are hiring fresh employees prompting increase in domestic consumption.
Reuters report quoted Yu Song and Helen Qiao, economists at Goldman Sachs, as saying that the strength of China’s official PMI was especially striking because the index normally heads down in October. They were quoted as saying, “The fact that the PMI went up despite this seasonal bias suggests real activity growth was likely to have been exceedingly strong in October.” (Emphasis added)
One has to wonder what real activity growth means! While almost all of the economists and analysts are unanimous that the China is leading the recovery of the world economy from the worst recession since great depression along with other emerging economies like India and Brazil, this observations is particularly striking. It indicates that the robust growth of China is mostly due to large economic packages offered by Chinese government. China increased its bank rate only once a month back and is keeping its other bank ratios at relatively low level. It has issued consumer and property loans to consumers and condoned repayment of loans issued to local governments over the last two years after recession.