China Economy

China’s manufacturing sector expands again in October amid steady economic growth

Sector boosted by commodity price rises, say analysts, but concerns remain in the economy, including asset price bubbles

PUBLISHED : Tuesday, 01 November, 2016, 11:34am
UPDATED : Tuesday, 01 November, 2016, 10:03pm

Manufacturing in China expanded last month, surveys released on Tuesday showed, indicating Beijing has more leeway to focus on safeguarding against asset price bubbles and carry out economic reforms rather than introduce measures to boost the nation’s slowing economy.

China’s official manufacturing purchasing managers’ index, which mainly reflects conditions at state-owned companies, came in much better than analysts expected at a more than two-year high of 51.2 last month, according to the National Bureau of Statistics and the China Federation of Logistics and Purchasing.

A reading above 50 indicates expansion, while one below means contraction.

The previous month’s reading was 50.4.

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“The better-than-expected PMI adds new signs of a firmer footing for the economy,” said Li Huiyong, chief macro analyst at Shenwan Hongyuan Securities. “We think policymakers will keep monitoring the impact of existing measures before taking further action.”

He said the central bank would keep its current prudent monetary policy unchanged, refraining from further tightening of interest rates or measures to increase money supply.

China’s economy grew at the slowest pace in 25 years last year and the authorities are attempting to shift its growth model away from debt-fuelled development and traditional manufacturing towards the service sector and high-tech industries.

Zhou Hao, a Commerzbank economist, wrote in a research note that the significant improvement in the index was largely driven by rising commodity prices, reflecting massive speculation in China markets.

He noted the overall policy tone has turned less dovish in favour of tighter monetary policy as the economy was improving, but concerns remained over increasing asset bubbles.

More than 20 cities launched measures to curb housing prices early last month. China’s Politburo also held a meeting on October 28, stating preventing asset bubbles was a goal of monetary policy.

Zhao Qinghe, a senior statistician at the bureau, said on its website that the strong expansion was partly due to recovering demand, plus rising industrial prices thanks to Beijing’s efforts to retire obsolete production capacity.

However, he also pointed out that downward pressure remains as new exports orders dropped 0.9 to 49.2 and new imports orders fell to 49.9 from September’s 50.4.

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A sub index for manufacturing output in the official index showed a rise to 53.3 from September’s 52.8, while new orders also edged up 1.9 percentage points to 52.8. They marked the highest levels this year for both sub index.

The official purchasing managers’ index outside the manufacturing industry edged up by 0.3 percentage points last month to a high this year of 54, signalling a pickup in growth in the services sector.

The Caixin China General Manufacturing PMI, which is slanted towards smaller privately owned companies, gained to 51.2 in October, the highest since July 2014, from September’s 50.1, according to a separate survey compiled by Markit on Tuesday.

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Julian Evans-Pritchard, a China economist at Capital Economics, said in a note that earlier loose monetary policy was still benefiting the economy and that this gain would continue until early next year.

“Beyond that, however, the recovery is likely to stall as the boost from stimulus fades, re-exposing the structural drags that continue to weigh on the economy,” he said.