China factory activity accelerates in July on strong export orders: Caixin PMI

An employee works at a silk factory in Nantong
An employee works at a silk factory in Nantong, Jiangsu province, China July 17, 2017. REUTERS/Stringer

August 1, 2017

BEIJING (Reuters) – Growth in China’s manufacturing quickened in July, a private survey showed on Tuesday, as output and new orders rose at the fastest pace since February on strong export sales.

But even as firms boosted purchasing in anticipation of more business, employment levels at factories fell at the fastest pace in 10 months and a reading on business outlook was the lowest since last August – a sign that economic momentum may start to ebb in the months ahead.

The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) rose to 51.1 in July, above the 50-point mark that separates growth from contraction, and well ahead of the 50.4 in June which was also the median figure forecast by 21 analysts in a Reuters survey.

A resurgent export sector underpinned by a brightening global economy helped China post surprisingly strong gross domestic product growth of 6.9 percent in the first half of the year.

The Caixin readings diverged from an official PMI survey released on Monday which showed growth in China’s manufacturing sector cooled slightly last month, with export demand slackening.

Divergence in the two indexes is usually a result of the Caixin PMI’s smaller sample size rather than anything fundamental to China’s economy, said Jonas Short, who heads the Beijing office at investment bank Sun Hung Kai Financial (SHKF).

The Caixin new export orders reading came in at 53.5 in July, up from 50.9 June and the highest since February.

Despite mixed signals, analysts are still generally optimistic about the outlook for China’s exports, even if there is a slight dip in July.

“We are not that worried about the export outlook for China in the second half,” said ANZ senior China economist Betty Wang.

While China’s foreign trade faces a mostly positive environment in the second half of the year, uncertainties still exist, Vice Commerce Minister Qian Keming said in Beijing on Monday.

The United States and China failed earlier this month to agree on major new steps to reduce the U.S. trade deficit with China, casting doubt over President Donald Trump’s economic and security relations with Beijing.

The broader consensus among China watchers is that economic growth will cool in coming months as a government crackdown on financial risks raises borrowing costs, squeezing profits and output. Yet, there appears to be more than enough momentum to reach Beijing’s growth target of around 6.5 percent for the year.

“Operating conditions in the manufacturing sector improved further in July, suggesting the economy’s growth momentum will be sustained.” Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group, said in a note accompanying the data release.

“That said, it’s unlikely that financial regulatory tightening will be relaxed.”

Chinese goods producers in July were able to raise output prices the most since March, Tuesday’s PMI showed, as input inflation also accelerated, though the price gains were much milder than those seen around the turn of the year.

Companies still expected to increase output over the next 12 months, but the reading was the lowest since August.

On the whole, while China’s manufacturing sector has remained resilient, companies’ outlook has now worsened or held steady since hitting a nearly two-year high in February.

That turning point roughly corresponds to when the Chinese government stepped up a campaign to rein in debt risks through a concerted deleveraging effort, which has driven up borrowing costs.

A Caixin/Markit survey covering China’s services sector will be released on Wednesday. The official survey showed the sector remained robust despite a slight slowdown last month.

(Reporting by Elias Glenn; Editing by Jacqueline Wong)