China Growth Limited by Struggling Small ManufacturersBloomberg News
Chinese manufacturing indexes showed small businesses struggling, sapping momentum in the economy and underscoring the need for the government to shift support away from larger, state-backed companies.
The official Purchasing Managers’ Index for smaller companies fell to 47.3 in May from 47.6 the previous month, even as the broader gauge rose to 50.8 from 50.6, the government said June 1. A private manufacturing index today that includes small enterprises fell more than forecast to 49.2, an eight-month low, from 50.4. Levels below 50 signal contraction.
The reports illustrate Premier Li Keqiang’s challenges in achieving sustainable growth across the world’s second-biggest economy while increasing consumption and reducing reliance on exports and investment. Declines in manufacturing gauges today in India, South Korea, Vietnam and Taiwan add to risks that Asian and global expansion will slow.
“It is too early to conclude that an economic rebound has begun” in China, Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, said in a report today. “There is still a strong bias towards larger enterprises and coastal areas in terms of fiscal and credit policy implementation,” and small and mid-sized companies appear to “operate with minimal policy support,” Shen wrote.
Divergences in the manufacturing indexes are common given their different focus and coverage, said Wang Tao, chief China economist at UBS AG in Hong Kong. The decline in the official PMI’s gauge for smaller companies is consistent with the HSBC index, Wang said before today’s release.
The MSCI Asia Pacific Index of stocks fell 1.4 percent as of 5:08 p.m. in Tokyo. China’s benchmark Shanghai Composite Index was down 0.1 percent at the close, while the ChiNext index of small companies dropped 2 percent.
Rising property prices may limit any potential efforts by the government to aid growth. China’s new home prices jumped in May by the most since they reversed declines in December, a report today from SouFun Holdings Ltd., the country’s biggest real estate website owner, showed after a survey of 100 cities.
The PMI reading released June 1 by the National Bureau of Statistics and China Federation of Logistics and Purchasing in Beijing was higher than all estimates in a Bloomberg News survey of 30 analysts and compares with the median projection of 50, which marks the dividing line between expansion and contraction.
HSBC Holdings Plc and Markit Economics today gave the final May reading of their manufacturing index, whose 49.2 level was the lowest since September. The gauge, which surveys fewer companies than the government’s report, had a preliminary figure of 49.6 released May 23, and the median estimate of 14 analysts was also for 49.6 today.
“Business activity at small businesses is much weaker than bigger companies, showing sluggish growth momentum,” said Ken Peng, a BNP Paribas SA economist in Beijing. The official manufacturing PMI’s output sub-index was higher than the one for new orders, “and that’s not a good sign because it reflects growing inventories at manufacturers,” Peng said.
Baoshan Iron & Steel Co., China’s biggest publicly traded steelmaker, lowered product prices for June delivery, according to a May 9 statement on its website, the first cut in nine months as supply exceeds demand. About 54 percent of the increase in steel output in the first four months of the year has become inventory sitting in warehouses, Wang Xiaoqi, vice chairman of the China Iron & Steel Association said last week.
Service industries expanded last month at the slowest pace since September, a separate government survey showed today, adding to pressures on Li. An NBS and federation gauge of service industries, the non-manufacturing PMI, declined in May to 54.3 from 54.5.
While the Asia manufacturing indexes outside China declined, gauges for the euro area, Germany and Australia showed improvement. A figure is also due for the U.S.
South Korea today reported the slowest inflation since 1999, leaving the central bank with more scope for cutting interest rates to spur growth. Consumer prices rose 1 percent in May from a year earlier. In Japan, a report showed a decline in capital spending in the first quarter.
In Hong Kong, Financial Secretary John Tsang maintained a forecast for the city’s economy to grow between 1.5 percent and 3.5 percent this year.
European Central Bank President Mario Draghi said in a speech in Shanghai that while the economic outlook in the euro area is “challenging,” he still expects a recovery this year.
President Xi Jinping said expansion is on a “more stable footing,” the Xinhua News Agency reported May 31. The fundamentals of the Chinese economy are “sound,” according to the English-language transcript of a written interview released by Xinhua before his visit to Latin America and the Caribbean.
Domestic demand, especially consumption, is playing a bigger role in driving growth, employment is stable and incomes are rising, Xi said.
A Bloomberg News survey of economists showed the People’s Bank of China is more likely to raise interest rates than cut them in the coming year.
Premier Li said the government will step up efforts to develop service industries to “help unleash huge potential in domestic demand” and bring “firm support for stable economic growth,” Xinhua reported on May 29, citing a speech he gave at a trade fair in Beijing.
Even with the drop in the index, service industries are “expanding at a quite high rate,” said Sun Chi, a Hong Kong-based economist at Daiwa Capital Markets. At the same time, economic growth will be “relatively flat” in the coming months with the absence of a major policy shift, she said.
“Big Chinese enterprises are at the front of the line to benefit from pro-growth policies and eased credit,” Sun said.
HSBC will release its services PMI on June 5. The official survey hasn’t dropped below 50 since a new data series started in March 2011 and HSBC’s has shown expansion for at least four years.
Service industries accounted for about 45 percent of gross domestic product last year, according to statistics bureau data, up from 41 percent in 2003. The government is seeking to increase the share to 47 percent by 2015, according to its five-year plan. In the U.S., services comprise about 90 percent of the economy.