China economy

Is China’s economy heading north or south? August indicators point in opposite directions

It was another strong month for manufacturing firms, but growth in the service continued to slow

PUBLISHED : Thursday, 31 August, 2017, 8:40pm
UPDATED : Thursday, 31 August, 2017, 10:32pm

With two of China’s economic indicators seemingly heading in opposite directions, local economists are debating whether the country’s US$11 trillion economy is entering a new growth phase.

Growth in China’s manufacturing sector accelerated in August, but the rate of expansion among the country’s service industries continued to slow, according to official figures released on Thursday.

The purchasing managers’ index for the manufacturing sector rose to 51.7 in the month, from 51.4 in July, though remained on a par with the June figure, the National Bureau of Statistics said.

Meanwhile, the non-manufacturing PMI, which measures activity in a range of service industries – from air travel to construction – fell to 53.4 in August from 54.5 in July and 54.9 in June. The August reading was its lowest since May last year.

IMF ups growth outlook for China as Beijing declares war on ‘zombies’

Despite the differing trends of the two indexes, both readings for August were above the 50 point line that separates contraction from expansion. Economists at JPMorgan in Beijing were not overly surprised by the figures.

“The notable rebound in the August manufacturing PMI suggests that the broad-based disappointment in the July activity indicators was likely temporary, and will likely be followed by some decent rebounds in August,” they wrote in a research note.

A “benign” economic situation may offer a window for Beijing to address the headache of an elevated corporate debt burden, the note said.

Moody’s Investors Service on Thursday become the latest institution to revise up its forecast for China’s growth. The agency, which downgraded China’s sovereign rating earlier this year, said in a report that it now expects China’s GDP to grow by 6.8 per cent this year from its previous forecast of 6.6 per cent.

China hints at more government spending to shore up economic growth

Zhang Yiping, an analyst with China Merchants Securities, said growth might accelerate in the third quarter to match the 6.9 per cent recorded in the first half of the year.

However, he warned that the widening gap between the prices of industrial raw materials and factories’ output might squeeze the profit margins of downstream businesses.

Also, while the recent rebound in the prices of coal and steel was a boon for large companies, the China Federation of Logistics and Purchasing, which compiles the PMI with the statistics bureau, said that activity in smaller manufacturing firms actually contracted in the month.

Smaller firms cannot react quickly enough to factor upstream price increases into their own product prices, which means they come under a lot of cost pressure, it said.

On the macroeconomic level, it warned that foreign trade barriers and disputes might damage China’s exports.

China’s fastest-growing city leads for the 10th straight quarter

While the PMI reading for the services sector remained in positive territory in August, its deceleration was a cause for concern for JZ Securities’ chief economist Deng Haiqing.

“The service sector accounts for more than half of [China’s] GDP,” he wrote in a research note. “If the non-manufacturing PMI further weakens, it may lead to a slowdown in the economy.”

JPMorgan forecast a “moderate easing” of economic expansion in the third and fourth quarters, which would result in a full-year growth figure of 6.8 per cent, or slightly below the actual rate achieved in the first half.

China International Capital Corporation, one of the leading brokerage firms on the Chinese mainland, said it was cautiously optimistic about the country’s long-term growth prospects.

“Manufacturing upgrading will continue despite any short-term problems,” it said in a report. “As industrial companies have been cautious about expanding capacity [thus far], we are relatively optimistic about the future for investment and manufacturing profit growth.”