China Manufacturing Gauge Climbs in Sign of Pickup

A Chinese manufacturing gauge rose to a seven-month high in June, supporting Premier Li Keqiang’s contention that the economy will avoid a hard landing as the government steps up efforts to spur growth.

A preliminary Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics was at 50.8, exceeding the 49.7 median estimate of analysts surveyed by Bloomberg News and a final reading of 49.4 in May. A number above 50 indicates expansion.

JPMorgan Chase & Co. and Barclays Plc raised growth forecasts after the report suggested the government’s measures will help protect its 2014 target of about 7.5 percent even as fixed-asset investment gains slow and the property market slumps. Li said last week that his officials are making adjustments to aid expansion without resorting to “strong” stimulus.

“It is a very good number,” said Dong Tao, chief regional economist for Asia excluding Japan at Credit Suisse Group AG in Hong Kong. “It is a surprise, too, as most people are focusing on infrastructure investment and the property market.”

While the data sparked early gains in stocks, the advance was wiped out amid investor speculation that falling property prices and tighter liquidity in the banking system will weigh on economic growth, said Huaxi Securities Co. The Shanghai Composite Index slipped 0.1 percent, with a gauge of developers slumping 1 percent. The Australian dollar jumped 0.5 percent.

Final Reading

The report, known as the Flash PMI, is typically based on 85 percent to 90 percent of responses to surveys sent to purchasing managers at more than 420 companies. The final reading is due July 1. Estimates of today’s number from 17 analysts ranged from 49.0 to 50.4.

Today’s survey showed increases in subindexes for output and new orders, a faster drop in stocks of finished goods and a slower decline in jobs. New export orders expanded at a slower pace and input prices rose, according to HSBC and Markit.

JPMorgan increased its projection for second-quarter growth to a 7.2 percent seasonally-adjusted annual pace compared with the previous period, up from a prior projection of 6.8 percent. Barclays raised its 2014 expansion forecast to 7.4 percent from 7.2 percent.

A separate manufacturing PMI from the National Bureau of Statistics and China Federation of Logistics and Purchasing will also be published July 1. That gauge rose to 50.8 in May, the highest reading since December, from 50.4 in April.

More Measures

The Chinese government will “continue rolling out more measures to stabilize growth,” Lu Ting, chief Greater China economist at Bank of America Corp. in Hong Kong, said in a note today. Even with the actions, growth in the economy from a year earlier is likely to slow in part because of “ongoing headwinds from the anti-corruption campaign and the property downturn,” Lu wrote.

Another private report today showed China’s economic slowdown deepened this quarter, as capital spending showed weakness and fewer companies applied for credit. The slowdown hurt hiring and wages, and interest rates offered by shadow lenders fell below levels offered by banks, according to the China Beige Book, a quarterly survey modeled on the U.S. Federal Reserve report of the same name.

Credit Suisse’s Tao said he maintained his forecast for 2014 growth of 7.3 percent and that he will gain confidence to raise it only if fixed-asset investment picks up. “How deep the property-market slowdown will be is hard to know,” he said.

Li’s Promise

Speaking in London on June 18, Li said China will rely on “smart and targeted regulation” rather than strong stimulus to protect the official growth target. “I can promise everyone honestly and solemnly, there won’t be a hard landing.”

Data released earlier this month painted a mixed picture of the economy after Premier Li’s targeted measures to support growth that fell below his 2014 target in the first quarter. Efforts to aid expansion have included accelerating infrastructure spending, tax cuts, and limiting money-market interest rates.

Gains in industrial production and retail sales accelerated in May, exports rose a more-than-estimated 7 percent from a year earlier, and new loans and money supply topped estimates.

At the same time, January-May fixed-asset investment grew 17.2 percent, the weakest pace for that period since 2000, according to data compiled by Bloomberg, and a decline in home sales and new construction persisted. Property is the biggest risk to the economy, according to Societe Generale SA and JPMorgan Chase & Co.

“We expect policy makers to continue their current path of accommodative policy stance until the recovery is sustained,” Qu Hongbin, HSBC’s chief China economist in Hong Kong, said in a statement today. The government’s so-called mini-stimulus is “filtering through to the real economy,” Qu said.

The central bank announced a cut in some lenders’ reserve requirements on June 9 to help boost funding for smaller companies and agriculture. China Merchants Bank Co., Industrial Bank Co. and China Minsheng Banking Corp. said last week that they got half percentage-point reductions.