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China's manufacturing sector continues to improve, and 2017 still faces challenges

The manufacturing sector stabilizes and continues to improve, partly because the demand side has improved, while the manufacturing sector has shown a strong resilience. But at the same time, manufacturing still faces big difficulties.

Data released by the national bureau of statistics earlier this month showed that China's manufacturing purchasing managers' index (PMI) was 51.4 per cent in December 2016, maintaining an expansion range. It was slightly below last month's 0.3 percentage point, but a year high. For the full year, the manufacturing PMI was operating in the expansion range for most of the year, and has remained above 50 per cent for five consecutive months since August. Between August 2015 and February 2016, the manufacturing PMI was running at a contraction band of below 50% for seven consecutive months. This reflects a significant improvement in manufacturing conditions since 2016, especially in the second half of the year, and an important contribution to achieving the annual economic growth target.

Manufacturing can stabilize and continue to improve, on the one hand, because of the demand side, since March 2016, the new orders index remained at 50%, since August generally over 51%, significantly better than in 2015. On the other hand, the manufacturing industry has a strong resilience. In the past two years, the manufacturing PMI has fallen by 50 percent, but the production index has remained at 50 percent. As demand improved in 2016, manufacturing companies seized the moment and production expanded.

But we also need to recognize that manufacturing is still facing greater difficulties, so there is also the possibility of falling into contraction territory in 2017. We can see some signs of trouble in the PMI indicators.

As demand improves, the price of raw materials is starting to rise sharply, and the latter is faster than the former. In December 2016, the main raw material purchasing price index reached 69.6 percent, up 1.3 percentage points from the previous month, and the index has risen every month since June. In December, non-manufacturing index prices also reached 56.2%, while selling prices rose by half a percentage point to 51.9% from the previous month.

A rise in price-related readings in the PMI indicates that PPI and CPI are likely to continue to rise in December 2016. This is the price of raw materials and fuel in the upstream of the industrial chain spreading downstream, and there will be greater inflationary pressure in 2017. For manufacturing, rising prices in the upstream will lead to increased costs and squeezed margins. In 2016, the impact of upstream price rises was not fully reflected downstream, and improved demand helped companies absorb the cost of growth. But there is uncertainty about whether demand can continue to improve in 2017, and the likelihood of a bigger impact from higher raw material prices is very high.

According to the analysis by zhao qinghe, a senior statistician from the national bureau of statistics, the rising cost of logistics in addition to the price of some production data is also worth the attention. At the beginning of 2016, the cost of health was listed as the "three to one health and one health" task, but at the end of the year, some companies still complained about high operating costs. This is a question worth pondering.

Manufacturing companies' expectations also reflect some difficulties in recognizing the production and operation of 2017. In December 2016, the expected index of production and operation activity was 49.5 percent lower than that of last month, below the critical point. However, the raw material inventory index, finished goods inventory index and employment index have all declined to a different degree from last month, and continue to operate in the contraction range. These indicators reflect that some businesses are not fully confident.

In addition, manufacturing enterprises have some difficulties in financing, especially small enterprises. Zhao Qinghe, according to the survey, reflecting the cash-strapped small businesses close to sixty percent, since 2016, financing difficulties, financing your small business still is one of the main difficulties the production and business operation. A survey of global research at standard chartered bank, also showed that most of small and medium-sized enterprise financing costs are high, the month of December 2016, because of the money market liquidity squeeze, financing difficulty is further improved.

The improvement in the demand for manufacturing in 2016 is partly due to the large scale of financing, which is a reflection of "moderate expansion of aggregate demand". However, the manufacturing difficulties still have many problems, and the supply side still has many problems. Therefore, the supply-side structural reform will continue to be deepened in 2017.

The increase in the scale of social financing in the january-november period was 16.08 trillion yuan, already more than the 15.41 trillion yuan in the whole of 2015. If you take into account government bond financing that does not include social financing, the amount of financing in 2016 is much larger than in 2015. According to data from the China bond information network, the total issuance of government bonds was 8.7 trillion yuan in january-november 2016, compared with 5.8 trillion yuan in 2015. But only part of the financing to promote the development of the real economy, and quite a number of conversion to asset prices and inflation, eventually lead to rising cost of enterprise, it is bad for the real economy.

To deepen supply-side structural reform in 2017, we need to have more comprehensive deployment and coordination. First of all, in addition to the "three to one health and a supplement", we should also focus on revitalizing the real economy and promoting the steady and healthy development of the real estate market. Second, there is a need for coordination between the "three to one health and one health" task, which requires more leverage and cost reduction in 2017.