The slight rebound in the nation's Purchasing Manager's Index (PMI) from 51.2 in July to 51.7 in August has given new hope to investors. The official survey, released last week, was a factor in market rallies in both New York and Hong Kong.

A PMI reading of 50 or higher is indicative of an expanding economy while under 50 implies a contracting economy. August's PMI figures was the 18th consecutive month in which the mainland posted a reading of more than 50. However, PMI figures on the mainland had been declining since May, causing some nervousness about the country's economic outlook for the second half of the year.

The PMI figures for July actually marked a 17-month low.

The August figures, however, indicate that the domestic economy could still maintain relatively steady growth for the remainder of the year, although the pace may slow further in the third quarter. The new order index in August for overall manufacturing witnessed a significant jump from 50.9 in July to 53.1.

Breaking down the figures by sector, the indices for food manufacturing, petroleum processing, special-purpose equipment and instruments, metres, cultural and office machinery sustained their upward trend. Meanwhile the indices for timber processing, furniture, textile and chemical fibre were still below 50, revealing divergence among various sectors.

However, the indices for raw material inventory and finished product inventory in the overall manufacturing sector slid from 47.8 and 49.9 in July to 47.3 and 46.9 in August, respectively.

The indices for raw material inventory and product inventory saw consecutive decreases in the past two months, indicating that most manufacturers have accelerated their product sell-offs amid concerns over a probable economic slowdown.

However, the cost pressure for manufacturers obviously increased in August, with the buy-up price index swelling from 50.4 in July to 60.5. The buy-up prices for steel, chemical fibre, rubber and plastic products started to bounce back after consecutive declines over the past few months.

Supported by the increases in new orders and buy-up prices, the PMI for manufacturing rebounded slightly in August. Looking ahead to the approach of the national day holidays and a consumption boom, the indices for new orders, production and buy-up prices may advance further in September.

However, in light of the government's repeated tightening efforts towards the property sector and industries with obsolete production capacity, the PMI for overall manufacturing is likely to remain below 55 during the next few months.

As the mainland is also faced with a huge challenge in meeting its energy-saving targets set in the 11th Five-Year Plan, the government will push forward with its efforts to reduce production in some heavy industries, especially energy guzzlers and high polluters. In fact, July marked the first time the country's light industries exceeded heavy industries in terms of value-added industrial output (VAIO) growth since mid-2009, pointing to a probable further slowdown in overall VAIO growth going forward.

Peter Pak is executive director of BOCI Research Ltd. The opinions expressed here are entirely his own and do not represent BOCI or any other affiliated companies within the group.

(HK Edition 09/07/2010 page2)