Rising prices suppress manufacturing demand in May; slight recovery in services
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Rising prices suppress manufacturing demand in May; slight recovery in services
China's May manufacturing PMI fell back to the critical point of 50, with new orders shrinking for the first time in five months. Cost pressures caused by oil price shocks are being transmitted downstream. The services PMI returned to the expansion zone but construction remains weak.
- Manufacturing PMI declined 0.3 points month-on-month to the critical value of 50
- New orders index dropped 0.7 points to 49.9, falling below the boom-bust line for the first time in five months
- Input-output price difference continues to widen (60.5 vs 51.9)
- Declining raw material inventories and increasing finished goods inventories indicate cautious signals
- Services PMI rebounded 0.7 points to 50.1, returning to expansion
Report interpretation
Overview
Deutsche Bank's China macro report analyzes May's PMI data, showing that manufacturing activity has fallen back to the threshold between expansion and contraction, mainly reflecting the reverse restraining effect of rising prices on end-user demand. Despite some offset from the service sector, the continued weakness in construction may prolong downward economic pressure.
Core views
The core contradiction in manufacturing lies in the widening supply-demand gap: the production sub-index remained at 51.2 (a drop of 0.3 points month-on-month), indicating continuous factory production. However, the new orders sub-index fell 0.7 points to 49.9 (the first fall below 50 in five months), while new export orders plummeted 1.7 points to 48.6, indicating production is outpacing demand. The imbalance in price transmission has worsened: the input price index remained high at 60.5 (continuous expansion for five months), while the output price index was only 51.9. Companies' inability to fully pass on costs has put pressure on profits, which may have already begun to suppress purchasing and production decisions. Inventory signals shift toward caution: the raw materials inventory index fell 0.7 points to 48.6, while finished goods inventory rose 1.8 points to 49.3, indicating that companies are reducing purchases due to high input costs, while sluggish terminal sales lead to product accumulation. Although there is no classic inventory buildup yet, this trend needs attention. Partial compensation from services: The services PMI rebounded 0.7 points to 50.1, returning to expansion. Information technology/finance/transportation maintained high activity levels (over 55). However, construction remains in the contraction range (48.8), suggesting that investment weakness since April may continue into May.
Analysis framework
The report verifies the price-suppressing demand hypothesis through a triple evidence chain: 1) Order-production gap: combining contradictory data of contracting new orders while stable production; 2) Price scissors difference: tracking the dynamic difference of 52 months between input/output price indices; 3) Inventory anomalies: revealing changes in corporate behavior through upstream destocking and downstream accumulation. High-frequency data cross-validation (such as steel price recovery, oil price transmission diffusion) completes the closed logic loop of price-driven demand suppression.
Methodology notes
PMI sub-item linkage analysis
By comparing diverging trends of production, new orders, and inventory sub-items, it reveals changes in supply-demand dynamics. When the production index exceeds the order index, it indicates supply surpasses actual demand. The combination of upstream destocking and downstream accumulation usually reflects a more cautious corporate outlook.
Cost transmission capability
This indicator measures the company’s ability to pass on input costs to downstream players. When the difference remains high (e.g., 60.5-51.9=8.6 points), it shows companies are experiencing profit compression. If this exceeds the tolerance threshold, it could lead to production cutbacks.
Key data
- Manufacturing PMI50.0Down 0.3 points month-on-month, back to the expansion/contraction threshold
- New Orders Index49.9Down 0.7 points month-on-month, first fall below the boom-bust line in five months
- Finished Goods Inventory Index49.3Up 1.8 points month-on-month approaching the critical 50 level
- Services PMI50.1Up 0.7 points month-on-month, returning to the expansion range
Impact & implications
Price pressures triggered by oil price shocks are spreading from upstream to downstream. The continuously widening input-output price gap shows that manufacturing profit margins are being compressed. If future demand does not rise simultaneously, it could lead to capacity contraction. The recovery in services provides some cushion for the economy but lacks sufficient strength. The drag from construction still requires policy intervention to resolve.
Risks
- Continued transmission of external oil price shocks
- Upstream cost pressures compressing manufacturing profits
What to watch
- Matching degree of new orders and capacity utilization
- Signs of improvement in cost transmission capability