Data gives mixed picture of China's economy

HSBC survey shows surprise increase in manufacturing while China Beige Book reports weakness in other sectors and capital spending

PUBLISHED : Tuesday, 24 June, 2014, 5:58am
UPDATED : Tuesday, 24 June, 2014, 8:43am

A private survey on the mainland manufacturing sector showed a surprise jump to a seven-month high, but a China Beige Book report pointed to a deepening slowdown in other economic sectors such as real estate and services, with capital spending showing weakness and fewer companies applying for credit.

The mixed picture indicates that the economy may be gaining momentum, thanks to the government's recent easing policies, but Beijing faces a tough slog to rebalance into an economic growth model inspired more by consumption instead of capital spending.

The preliminary HSBC manufacturing purchasing managers' index for the mainland rose to 50.8 from 49.4 in May, with improvement seen in domestic orders and external demand indicators. The reading beat the market consensus of 49.7.

A reading above 50 indicates expansion, while a figure below that level means a contraction.

"This month's improvement is consistent with data suggesting that the authorities' mini-stimulus are filtering through to the real economy," HSBC chief China economist Qu Hongbin said in a statement.

Qu was referring to efforts taken by Beijing in the past months to support weaker sectors and small businesses through tax breaks, cuts in banks' reserve requirement ratios and export rebates.

"Over the next few months, infrastructure investments and related sectors will continue to support the recovery. We expect policymakers to continue their current path of accommodative policy stance until the recovery is sustained," he said.

Some institutions recently raised their forecasts for the mainland's gross domestic product growth, after Premier Li Keqiang repeatedly assured that the official growth target for this year of about 7.5 per cent would be met.

Barclays Capital raised its forecast to 7.4 per cent from 7.2 per cent. It said there would be more monetary easing this year, with two cuts in benchmark interest rates of 25 basis points each in the third and fourth quarters.

While the China Beige Book's quarterly survey shows year-on-year expansion in manufacturing, the report said other sectors such as transport, mining, retail and services all weakened.

"What stands out is weakness - perhaps unprecedented weakness - in capital expenditure," Leland R. Miller, the president of New York-based CBB International, and Craig Charney, a director of research and polling at the institute, said in a statement.

"Since investment has been the engine of the economy for the past seven years, this weakness has sweeping effects on sectors, regions and gauges of firm performance.

"Overinvestment has been an addiction and withdrawal symptoms will not be pretty."

But it remained too early to say if slowing capital spending meant rebalancing was happening, they said.

While manufacturing was stable as the Beige Book survey showed, services continued to weaken, driving the overall growth slowdown and indicating that there has been no shift from manufacturing to services.

Beijing has said it would overhaul the country's economic structure, boosting the role of consumption through faster development of the services sector while trimming reliance on investment and exports amid concerns about financial risks and soaring labour costs.

On the property market, realtors - both residential and commercial - were pummelled, with revenues squeezed by weaker pricing. However, developers reported higher starts and rising prices, the CBB survey found.

Despite the mixed readings in the CBB and PMI survey reports, both indicated that the economy has been driven more by domestic rather than external demand.

New domestic order growth in the CBB report outpaced new foreign order growth for the 10th consecutive quarter. Likewise, the output sub-index in the PMI survey rose to a 7-month high of 51.8 from 49.8 in May, while new export orders weakened from May.