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The pick up in the metric was somewhat at odds with the official manufacturing PMI released by the National Bureau Statistics on Thursday, which dropped to 49.2 from 49.5 in January, meaning that the contraction of China’s factory activity intensified last month. Photo: Reuters

China manufacturing stabilised in February, but ‘too soon to call bottom of current economic cycle’

  • Results in contrast to official manufacturing purchasing managers’ index, which deteriorated further in February
  • Like official survey, the private index shows domestic orders rose even as overseas orders fell

It remains “too soon to call the bottom of China’s current economic cycle” despite China’s manufacturing sector stabilising in February as new orders and production rebounded in the holiday shorted month, according to new economic data released on Friday.

The manufacturing sector purchasing managers’ index (PMI), compiled by Markit and published by Caixin, rose to 49.9 in February, the highest level in three months, from 48.3 in January.

The rise was stronger than expected, with analysts having predicted a modest increase to 48.5, according to a Bloomberg survey.

The February reading was just below 50.0, meaning manufacturing activity contracted very slightly during February, which included the Lunar New Year holiday.

“The upshot is that it is probably too soon to call the bottom of the current economic cycle,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

“Indeed, we expect growth to continue to come under pressure until the middle of this year.”

The pick up in the metric was somewhat at odds with the official manufacturing PMI released by the National Bureau Statistics on Thursday, which dropped to 49.2 from 49.5 in January, meaning that the contraction of China’s factory activity intensified last month.

In contrast to the official PMI, which focuses more on larger, often state-owned companies, the Caixin survey covers more than 500 manufacturing companies, most of which are smaller, privately owned firms.

“Overall, with the early issuances of local governments’ special-purpose bonds and targeted adjustments to monetary policy, the situation in the manufacturing sector recovered markedly in February due to the effect of increased infrastructure investment,” said Zhong Zhengsheng, director of macroeconomic analysis at CEBM Group, a research organisation affiliated with Caixin.

As growth momentum in the world’s second largest economy slowed down amid the US trade war and weakening demand at home, China has been pushing local governments to step up fiscal spending on infrastructure projects.

However, the National Development and Reform Commission, the country’s top economic planning agency, warned this week that infrastructure investment was still under pressure because of a decline in investor confidence.

Economists, led by Helen Qiao, from the Bank of America Merrill Lynch predicted that policymakers were likely to announce during the National People’s Congress sessions that start next week a significant increase in the quota for local government special bond issuance.

They also predicted an expansion in other funding channels, such as local government financing vehicles and public-private partnerships, to support expanding infrastructure spending.

Analysts warned that February’s PMI reading was potentially distorted by the timing of the Lunar New Year holiday, when manufacturing activities are cut back sharply or even halted altogether.

The February reading was just below 50.0, meaning manufacturing activity contracted very slightly during February, which included the Lunar New Year holiday. Photo: Reuters

“To smooth out distortions caused by shifts in the timing of the Lunar New Year holidays, it is a common practise to combine January and February data,” said Lu Ting, chief economist at Nomura International in Hong Kong.

The average Caixin PMI was 49.1 in the January-February period, lower than 49.7 in December and 50.2 in November, Lu noted.

“We maintain our view that growth momentum is losing steam, as implied by the lower Caixin and official PMIs in January-February. We expect real [gross domestic product] growth to slow further in the first half, especially in the second quarter, dragged down by synchronised demand shocks,” Lu wrote.

Still, there were positive signs in the details of the Caixin report as both manufacturing production and total new orders “expanded slightly” in February, even though new export orders contracted during the month, according to Caixin.

“The data indicated that the upturn was predominantly driven by greater domestic demand,” Caixin said.

That echoed the picture drawn by the official figures, which showed a rise in total orders despite the fastest contraction in export demand in a decade, suggesting a strong rise in domestic demand during February.

The gauge for new export orders slipped back into contraction in February after a rise during the previous month.

“Domestic manufacturing demand improved significantly, and foreign demand was not deteriorating as quickly as last year,” said Zhong from CEBM Group.

But manufacturers remain cautious, with their confidence edging down slightly, even though they were generally confident that output would rise over next 12 months, the private survey showed.

The pressure on manufacturers’ access to capital has become obvious again, meaning the financing environment has not yet eased, Zhong added.

“The effect of credit expansion is not yet significant,” he said.

This article appeared in the South China Morning Post print edition as: Private data shows stabilisation in output at factories
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