Manufacturers under multiple pressures

High on inflation, short on power supply

• China’s manufacturing sector accounts for over one-fifth of fixed asset investment; therefore, its vitality is crucial for the near-term economic outlook as well as the feasibility of Beijing’s ongoing efforts to refashion policy and incentives to encourage economic rebalancing.
• However, China’s factory activity in October contracted for a second month. Indeed, the official manufacturing PMI declined from 49.6 in August, to 49.2 in October.
• Most sub-components reflect a deterioration in conditions. Particularly noteworthy was the record increase in input prices – the biggest gain since 2010, to now the highest level on record.
• Perhaps even more worrying is the deterioration in current and future expectations, which fell by the largest amount in a single month since 2015, to the lowest level in two years and for an eighth consecutive month. 
• Electricity shortages, coupled with soaring commodity prices, continued to weigh on manufacturers who have been unable to pass on increases to consumers.
• Producers however will likely try to pass inflation on to domestic and foreign consumers because cost pressures are not going to subside until energy prices abate.
• The PMI sub-component implies that manufacturers acknowledge peak winter energy demand as only occurring in Q4:21, foretelling of further power supply troubles ahead. 
• So far, China’s headline consumer price index (CPI) remains well below the PBoC’s inflation target, but recent gains in vegetable prices are concerning, as food accounts for 28% of China’s CPI basket.
• Inflationary pressures, coupled with power shortages, will therefore limit the authorities’ ability to stimulate China’s economy.