The mainland's official PMI rebounded to 51.7 percent in August from 51.2 percent in July after falling for three consecutive months. The bounce may have encouraged investors, but they shouldn't read too much into the figures as seasonality played a significant role in the spike.

Judging by the historical movement of PMI figures, the rebound in the August PMI was primarily due to a seasonal pickup in new orders and production. With the exception of 2008, the PMI for August over the past six years has been higher than that for July, by 0.7 percentage point to 1.5 percentage points. After adjusting for seasonality, August's PMI actually remained flat compared with July.

New order PMI rose by 2.2 percentage points to 53.1 percent in August, reflecting mild improvement in both domestic and export demand. The new exports order index rose by 1.0 percentage point to 52.2 percent in August on the back of increasing Christmas orders, as has been widely reported by local media. Export orders are likely to remain strong over the next two to three months.

While the new order PMI rose significantly, the production PMI only picked up by 0.4 percentage points to 53.1 percent. This implies that some manufacturing sectors are absorbing inventory.

Both raw material inventory PMI, which declined by 0.5 percentage points to 47.3 percent, and finished goods inventory PMI, which declined by 3.0 percentage points to 46.9 percent, continued to fall as the result of sustained inventory reduction in some manufacturing sectors.

Since May, finished goods inventory PMI experienced a greater decline than raw materials inventory PMI, as some heavy industries are still enduring high inventory levels.

Among these sectors, finished goods inventory PMI for petroleum/coking production, chemical fiber and non-ferrous metal refining stood above 50.0 percent, implying that these sectors are still suffering from high inventory levels.

The input price index rose significantly, by 10.1 percentage points to 60.5 percent, following a three-month decline since May. Among 20 manufacturing sectors, the input price index for 11 sectors - mainly entailing the consumer and industrial goods sectors - soared above 60.0 percent. The PPI for August is expected to rebound slightly, driven by price hikes in most industrial products.

Industrial production will experience a mild rebound in August (from 13.4 percent YoY in July to 13.8 percent YoY in August), driven by rising export demand for the upcoming Christmas season and the moderation in the production contraction taking place in the country's heavy industries.

The pickup seen in the August PMI points to a soft landing for the manufacturing sector but not a sustained improvement. Major leading indicators in Western economies are still expected to weaken while domestic policies are expected to remain broadly unchanged, at least for the next two to three months.

Input price PMI rose substantially, by 10.1 percentage points to 66.5 percent in August, mainly due to price hikes in international commodities and domestic upstream products. This should lead to cost inflation pressure on downstream manufacturing sectors as well as a rebound in PPI, which is forecast at 5.0 percent year-on-year for August.

Benny Lam is an associate director and economist at CCBI Securities Ltd. Eliza Liu is an associate director and senior analyst at CCBI. The opinions expressed here are entirely their own.

(HK Edition 09/09/2010 page2)