China's Demand Might Be Recovering

After CLSA's monthly survey into Chinese manufacturers showed a slight improvement for January on Monday, today's release of the official manufacturing activity survey suggests a slow recovery might indeed be taking place.

It has to be noted though, the sector is still contracting and has been contracting for four months in a row, if we take guidance from the monthly Purchasing Managers' Index for China's manufacturing sector as compiled and published by the China Federation of Logistics and Purchasing and the Chinese government's& National Bureau of Statistics.

According to the official January PMI release, the Purchasing Managers' Index for China's manufacturing sector rose to 45.3% from 41.2% in December and a record low of 38.8% in November. A reading below 50% indicates contraction.

Also, a measure of export orders rose to 33.7 from 30.7 in December. The output index jumped to 45.5 from 39.4. The new-order index climbed to 45 from 37.3. The measure of unemployment, however, dropped to 43.0 from 43.3. In November, those indexes all fell to the lowest levels since the survey began in 2005.

Further fueling hope the Chinese economy may have left the worst behind, is a report by Bloomberg that a survey of 500 Chinese firms in 60 cities in December and early January by Nomura Holdings has revealed 60% had cut inventories to one or two months' use or sales, down from three to four months.

The Nomura survey indicates Chinese companies may start rebuilding their inventories later this quarter. This could boost demand for beaten down base materials.

The PMI is based on a survey of more than 700 companies in 20 industries, including energy, metallurgy, textiles, automobiles and electronics.The survey tracks changes in output, new orders, export orders, employment, inventories, input costs and output prices.