Deloitte: China's Manufacturing enters the winter season, but slow recovery seen continuing in H2

Published: 27 September 2013

China's manufacturing industry has entered the winter season along with slower economic growth in China and weak global economic recovery, according to latest report by Deloitte. Under the fragile economy, the "State of China Manufacturing Report" (2013, Q2) said China’s purchasing managers index (PMI) had stayed at the interaction of the boom and bust territories until it showed emerging signs of recovery in July. This upward momentum is expected to continue in the second half of this year.

The report begins with a high level review of key macroeconomic indicators and central policy trends, followed by analysis of the performance of major downstream industries which consume heavily from industrial product companies. It also reviews the performance of 51 sub-sectors within the manufacturing industry, represented by 734 listed companies in the China marketplace. The report intends to provide readers with timely and accurate review of the current conditions of China’s manufacturing industry, and reveal early signs of changes in market trend.

Deloitte China Manufacturing Managing Partner Ricky Tung said, "From macro-economic perspective, the new government no longer perceives GDP growth as its only key performance indicator. Instead, the focus has shifted towards economic and structural reforms. Recently, there has been stronger market outcry for steady growth and as such, the government may launch a series of economic support measures in priority industries. To some extent, the industrial added value and GDP are expected to increase in spite of economic uncertainty." Citing relevant economic data, he said “PMI of the manufacturing industry in July 2013 has reached 50.3, above market expectation. As we review the trend of PMI for the manufacturing industry during the past two quarters, the market expects that the manufacturing industry is already on its road to recovery although the overall PMI for the manufacturing industry was only just above 50.”

At the same time, the report also highlighted some potential challenges for the manufacturing industry. First, the new government appears to give higher priority to driving structural changes in economy. Under such circumstances, the central bank will no longer excessively increase liquidity for the purpose of stimulating the economy. On the contrary, it will require different institutions to raise their fund reserve in preparation for financial reform. Funded mostly by bank loans, new investments within the manufacturing industry will be affected by lower capital liquidity offered by banks. Tight-to-stable fund availability will translate into higher costs of capital and will discourage manufacturing companies from making new investments.

On the other hand, Renminbi appreciation and weak global economic recovery weigh heavily on China’s export performance during the current period. In June, exports decreased by 3.1 percent year-on-year before a rebound to a 5.1 percent growth in July. Market participants have divergent views about the export conditions in China. The government is pushing to increase national disposable income, one of the most important support factors for domestic consumption. Retail sales are expected to increase steadily, but the pace will be limited by a number of factors, including high real estate prices, deficiency in the social security system and citizen's saving habits.

From the public policy perspective, support is geared towards a number of industry sectors, including information consumption, energy saving, environment conservation, new energy, ocean engineering, railway construction and urban infrastructure. This will also drive the growth and recovery of the related upstream sectors.

With a research sample of 734 listed companies, the report tracks and analyzes the quarterly growth and financial results of 51 sub-sectors within the manufacturing industry. It also identifies factors that will boost the manufacturing industry. In particular, the report is optimistic about the following sub-sectors: optical parts, display devices, electric motors, jewelry, aviation and space equipment, and environmental conservation equipment. Because of sluggish economy, excessive production capacity and the lack of core competencies, the report is pessimistic about the following sub-sectors: textile and clothing equipment, commercial truck, engineering mechanics, shipbuilding, and heavy mechanics.

Mr. Zhang Tian Bing, the lead author and Consulting Lead Partner of Deloitte China Manufacturing, emphasized, "Companies, which enjoy an optimistic prospect, should opt for higher growth by improving their strategic plan, leveraging the potential in the relevant sub-sectors, and exploring new sources of customers. There are many reasons for negative growth in selected industry sectors. It is also not indicative of the dearth of growth opportunities for companies in these underdog sectors, which can consider adjusting their product portfolios and enhancing operational efficiency for higher revenue and lower costs. At the trough of the market cycle, companies should seize integration opportunities through mergers and acquisitions.”