Three Price Signals of PMI

Abstract:

➢ The problem of insufficient demand remains prominent. In June, the production index in the PMI was 50.6%, a decrease of 0.2 percentage points from the previous month; the new order index fell back below the boom-bust line by 0.1 percentage points to 49.5%. In the first 6 months of 2024, for 5 out of 6 months, the production index was higher than the new order index, continuing the macro pattern of "strong supply, weak demand". Manufacturing enterprises strongly feel the weak market demand. In June, the survey of enterprises showed that the proportion of manufacturing enterprises reflecting insufficient market demand was 62.4%, an increase of 1.8 percentage points from the previous month.

➢ In the June PMI, we believe there are 3 price signals worth noting.

➢ Signal 1: After three consecutive months of increase, raw material prices significantly fell in this period. In February, the main raw material purchase price index was 50.1%, then rose for three consecutive months to 56.9%, but in June, affected by the decline in industrial products, the raw material price index fell to 51.7%. The main driving factor for the rise in commodity prices in April and May was not domestic demand. From a micro-enterprise perspective, due to the passive increase in raw material purchase prices, manufacturing enterprises faced increased cost pressure. In June, enterprises reduced the amount of raw material purchases and increased the consumption of inventory raw materials, weakening the support for raw material prices. Looking ahead, we believe that the channel for year-on-year growth in PPI has not yet opened. Firstly, in the context of weak demand, the rise in industrial product prices is hindered; secondly, after the third quarter, the base effect rises, which is not conducive to the year-on-year rebound of PPI.

➢ Signal 2: Narrowing price difference between upstream and downstream. Using the "raw material price index - ex-factory price index" to measure the price difference between upstream and downstream enterprises, the difference rose to 6.5% in May, reaching a new high since May 2022. The widening of the price difference between upstream and downstream indicates increased cost pressure on enterprises. In June, the "raw material price index - ex-factory price index" decreased to 3.8%, indicating a marginal reduction in cost pressure for enterprises. It is worth noting that we believe that the short-term marginal relief of cost pressure is beneficial for the stable operation of enterprises, but in the medium to long term, the core contradiction of whether future corporate profits can improve still lies in the demand side. In June, the BCI enterprise profit outlook index fell by 3.3 percentage points to 45.7%, and the decrease in cost pressure did not improve the situation of weak expected profits for enterprises.

➢ Signal 3: Service industry "trading price for quantity". The summer is the peak season for service consumption. With the expectation of the peak season, in June, the business activity expectation indexes for retail, accommodation, and catering industries all showed significant increases from the previous month, all above 59%. Looking back at June in previous years, the PMI service industry price index generally shows a month-on-month increase. However, since the beginning of this year, the service industry price index has been consistently below the boom-bust line, recording 47.4% in June, a decrease of 0.1 percentage points from May. The weak service industry prices reflect that residents' purchasing power still needs to be boosted, and on the other hand, it may exert a certain drag on CPI increases➢ Risk Factors: Tightening credit policies; Overseas manufacturing industry recovery falling short of expectations.

Main Text

I. Three Price Signals from PMI

Overall, the June PMI remained flat compared to the previous month, in line with seasonal patterns. In June, the Purchasing Managers' Index (PMI) for the manufacturing sector was 49.5%, unchanged from the previous month. Looking at the month-on-month changes, the average month-on-month change in PMI from 2017 to 2019 was 0.03 percentage points, reflecting that the current PMI change follows seasonal patterns.

The issue of insufficient demand remains prominent. In June, the production index in the PMI was 50.6%, a decrease of 0.2 percentage points from the previous month; the new orders index fell back below the boom-bust line by 0.1 percentage points to 49.5%. In the first 6 months of 2024, for 5 out of 6 months, the production index was higher than the new orders index, continuing the macro pattern of "strong supply, weak demand". Manufacturing enterprises strongly feel the weak market demand, with 62.4% of surveyed enterprises in June indicating a perception of insufficient market demand, an increase of 1.8 percentage points from the previous month.

In the June PMI, we believe there are 3 price signals worth noting.

Signal One: After three consecutive months of increase, raw material prices significantly fell in the current period. In February, the index for main raw material purchase prices was 50.1%, then rose for three consecutive months to 56.9%, but in June, affected by the decline in industrial products, the raw material price index fell to 51.7%. We believe that the main driving factor for the rise in commodity prices in April-May was not domestic demand. From a micro-enterprise perspective, due to the passive increase in raw material purchase prices, manufacturing enterprises faced increased cost pressures. In June, enterprises reduced raw material purchases, increased inventory consumption of raw materials, and weakened the support for raw material prices. The purchasing quantity in June PMI recorded 48.1%, a decrease of 1.2 percentage points from the previous month. In April-May, industrial product prices rose, coupled with a low base in the same period last year, resulting in a significant narrowing of year-on-year PPI decline. However, looking ahead, we believe that the channel for year-on-year PPI growth has not yet opened. Firstly, in the context of weak demand, industrial product price increases are hindered; secondly, the base will rise after the third quarter, which is not conducive to the year-on-year rebound of PPI.

**Signal Two: Narrowing price differentials between upstream and downstream**Using the "Raw Material Price Index - Factory Price Index" to measure the upstream and downstream price difference of enterprises, the difference between the two rose to 6.5% in May, reaching a new high since May 2022. The widening of the upstream and downstream price difference means increased cost pressure for enterprises. In May 2024, the cost in every 100 yuan of operating income for industrial enterprises was 85.37 yuan, at a high level since 2017. In June, the "Raw Material Price Index - Factory Price Index" dropped to 3.8%, indicating a marginal reduction in cost pressure for enterprises. According to a survey of enterprises, the proportion of manufacturing enterprises reflecting high raw material costs in June was 43.7%, a decrease of 1.2 percentage points from the previous month, which also confirms this trend. It is worth noting that we believe that the marginal easing of cost pressure for enterprises is beneficial for stable operations in the short term, but in the medium to long term, the core contradiction of whether future corporate profits can improve still lies in the demand side. It can be seen that in June, the BCI Business Profit Outlook Index dropped by 3.3 percentage points to 45.7%, indicating that the decrease in cost pressure did not improve the weak expectations of enterprises.

Signal Three: Service Industry "Trading Price for Volume". In June, the business activity index for the service industry was 50.2%, a decrease of 0.3 percentage points from the previous month, still above the boom-bust line. The summer is the peak season for service consumption. With the expectation of the peak season approaching, the business activity expectation indexes for retail, accommodation, and catering industries in June all showed significant increases from the previous month, all above 59%. Looking back at June in previous years, the PMI service industry price index generally shows a month-on-month increase. However, since the beginning of this year, the service industry price index has been consistently below the boom-bust line, recording 47.4% in June, a decrease of 0.1 percentage points from May. The weak service industry prices reflect that residents' purchasing power still needs to be boosted, and on the other hand, it may exert a certain drag on CPI.

II. High-Tech Manufacturing and Export Chains Perform Well

Accelerated Expansion in High-Tech Manufacturing. The PMI for high-tech manufacturing was 52.3%, an increase of 1.6 percentage points from the previous month, with the production index approaching 54%, a rise of over 1 percentage point from the previous month. Looking at specific industries, the growth rates of railway, ship, aerospace transportation equipment manufacturing, electrical machinery and equipment manufacturing, and computer communication electronic equipment and instrument manufacturing were particularly prominentExport sub-items still show resilience. In May, the new export orders recorded 48.3%, a decrease of 2.3 percentage points from April, while this month's new export orders index remained consistent with May, without further decline. From high-frequency indicators, export performance is relatively good and may continue to be an important driver of the economy. In June, the container throughput of ports exceeded 6 million TEUs, reaching a new high since May 2022. Additionally, South Korea's export amount in the first 20 days of June increased by 8.6% year-on-year, higher than May's 1.4%.

On the other hand, traditional industries show a low level of prosperity. The PMI for high-energy-consuming industries and consumer goods industries are 47.4% and 49.5% respectively, continuing to be below the critical point. Production indexes for industries such as textiles, petroleum, coal, and other fuel processing are all below the critical point; new order indexes for industries like chemical raw materials and chemical products, non-metallic mineral products are running at low levels.

Third, under the influence of weather, construction industry growth slows down.

After the "May Day" holiday, the service industry's prosperity slightly declined. The business activity index for the service industry is 50.2%, a decrease of 0.3 percentage points from the previous month. After the concentrated release of demand during the May Day holiday, contact-based consumer-related service activities fell slightly from the previous month under the influence of a high base number. The end-of-quarter release of supply and demand in the monetary and financial services industry and the continued high growth in information services are the main supporting forces for the service industry to maintain expansion in June, with business activity indexes for monetary and financial services and telecommunications services both above 60%.

The growth rate of the construction industry has slowed down. Recent continuous heavy rainfall in many southern regions has had a certain impact on construction activities, with the business activity index for the construction industry at 52.3%, a decrease of 2.1 percentage points from the previous month. The business activity index for civil engineering construction has been above 55% for 5 consecutive months, with continued efforts in infrastructure investment-related activities. The issuance of ultra-long-term special national bonds in May has started, and the issuance of special bonds has also accelerated recently, with the prospect of an increase in available fiscal funds, which may further boost infrastructure investment.

Risk factors: Tightening credit policies; Overseas manufacturing recovery falling short of expectations