China Factory Gauge Signals Further Economic Stabilization

  • Factory PMI remains at 50.1, services reading slips to 53.1
  • Small, medium-sized manufacturers perked up in May, data shows

China Factory Gauge Signals Further Stabilization

China’s official factory gauge for a third month remained above the dividing line that signals improving conditions, adding to recent evidence of stabilization in the world’s second-largest economy.

The manufacturing purchasing managers index stood at 50.1 in May, the nation’s statistics agency said Wednesday, matching April’s level and compared with a median estimate of 50 in a Bloomberg survey of economists. The non-manufacturing PMI was at 53.1 compared with 53.5 in April. Numbers higher than 50 indicate improving conditions.

Fresh signs of resilience will be welcomed by policy makers, after weak April readings raised concerns that a first-quarter stabilization was faltering. Authorities are striving to keep economic growth above 6.5 percent this year while keeping a lid on debt and cutting excess capacity in industries including coal and steel.

“The economy is operating steadily right now, but lacking any upward momentum,” said Tao Dong, chief regional economist for Asia excluding Japan at Credit Suisse Group AG in Hong Kong. “The economy will wane again in the summer, and that will be a key test for the PBOC -- can it maintain stable policy and focus on supply-side management?” he said, referring to the People’s Bank of China.

Higher Output

Measures of output and purchase quantity rose, with small and medium-sized enterprises picking up, the manufacturing data showed. For the services gauge, declines in input prices and business activity expectations weighed on the index.

“The upshot is that while policy easing has clearly helped to stabilize growth in China this year, a significant rebound is proving elusive,” Julian Evans-Pritchard, a China economist at Capital Economics Ltd. in Singapore, wrote in a note. The PBOC has held its main interest rate at a record low since October after a series of reductions starting in late 2014.

The statistics authority warned about upcoming challenges for manufacturers as a gauge for new orders fell for the second month and the index for new export orders dropped. “Demand remains on the weak side, and the base for growth in the manufacturing sector isn’t solid yet,” the statistics bureau said in a statement released with the data.

A gauge of factory employment climbed to a one-year high of 48.2 while the corresponding level for services and construction weakened slightly to 49.1.

A separate manufacturing PMI reading from Caixin Media and Markit Economics fell to 49.2 in May, matching economists’ estimates and down from 49.4 in April.

Domestic Industries

The lack of pick-up in external trade underscores the economy’s reliance on domestic industries, said Iris Pang, senior economist for greater China at Natixis SA in Hong Kong.

“Domestic growth is mostly supported by real estate and related industries such as cement and steel, indicating leverage in zombie companies remains high,” she said. “The situation will continue as monetary policy is relaxed and fiscal stimulus is likely to continue.”

Steel industry data showed inventory stacking up even as foreign orders strengthen. Stocks of finished goods climbed above 50 for the first time in 10 months, to 50.2, while new export orders rose to 58.1 for the best reading in at least a year, the NBS said. The broader steel PMI gauge tumbled to 50.9 from 57.3 in April as metal prices slumped.

“That may reflect sluggish domestic demand ahead,” Fielding Chen, an economist at Bloomberg in Hong Kong, wrote in a note. While the headline PMI points to stable growth, “the metal sector and services sector indicate risks to the economy.”

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— With assistance by Xiaoqing Pi

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