The Markit Purchasing Managers Index or PMI is a monthly survey of 430 companies engaged in the manufacturing sector with their contribution to GDP weighted by industry and region. These weightings are adjusted at regular periods to reflect changes in industry structure. In many ways, this survey is reliable indicator of the state of the Chinese economy the previous month and is of importance to currency and commodity markets, but also logistics providers and supply chain managers.
This index is one of a number of business surveys conducted in China. One of the other most important is the China Federation of Logistics and Purchasing (CFLP). Although there is a great deal of similarity between the two in terms of methodology, the HSBC Markit survey is seen as an important counter counterbalance to official output data as it is conducted by a private enterprise and as such is independent from political pressure.
The headline figure, which is published and publicly available, starts from a baseline figure of 50. Readings above 50, say 55, mean things are a bit better than the previous month. 60 is a significant improvement. Likewise, 45 is slight deterioration, and lower increasingly serious. To give you some idea of the variance, in the aftermath of the financial crisis the Markit PMI fell to a low of 41.
At present the survey is weighted by sector as follows:
- Extraction and energy sector 18%
- Chemicals and plastics 12%
- Food and drink 11% and
- Basic metals 11%
The survey asks a series to questions to:
- Small businesses (1–499 employees) which make up 40%
- Medium-size businesses (500–2,499) employees make up 31%
- Large businesses (2,500 employees) make up 29%
As such, the HSBC Markit PMI gives greater weighting to smaller enterprises than the CFLP PMI.
Participants are asked to rate the current month’s situation in terms of 11 different areas:
• New orders
• New export orders
• Backlog of orders
• Stock of raw materials
• Purchasing of inputs
• Input prices
Supplier delivery times
In essence the questions asked are almost identical to those asked by CFLP, with only minor variations regarding the price of imports and output. An additional difference is the way in which the HSBC Markit PMI makes its seasonal adjustments. Which means it tends to be a more reliable figure than the CFLP number around holidays, in particular Chinese New Year which generally causes a great deal of upheaval. One of the major disadvantages of HSBC compared to CFLP is that HSBC only reveal data breakdowns to paying subscribers.
These sub-indices are useful as they give information on prices and employment which can show if companies are becoming more profitable, if inflation is in the pipeline or if companies are hiring or firing. This final point is useful because it is a much more dynamic indicator of unemployment than official figures which lag behind economic conditions.