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China factory growth unexpectedly quickens, but debt risks pressure economy
June 30, 2017 / 1:14 AM / 2 months ago

China factory growth unexpectedly quickens, but debt risks pressure economy

FILE PHOTO: Employees work inside a beer factory in Shenyang, Liaoning province, October 14, 2013.Stringer/File Photo

BEIJING (Reuters) - China's factories grew at the quickest pace in three months in June, buoyed by strong new orders in a sign of stabilising growth, though analysts expect a further slowdown in the world's second-biggest economy is inevitable as Beijing cracks down on debt risks.

The surprising strength in the vast manufacturing sector defied expectations for a cooling, thanks to robust external demand that underscored why global central banks were confident enough to switch gears to a more hawkish stance.

The official manufacturing Purchasing Managers' Index (PMI) was at 51.7 in June, the eleventh straight month of expansion, and up from 51.2 in May, a monthly survey by the National Bureau of Statistics showed on Friday.

It was the fastest pace since March and beat the 51.0 level predicted by analysts in a Reuters survey.

The survey supports broad consensus that China's economy is stabilising at a moderate pace rather than slowing sharply, suggesting that Beijing is on track to meet its annual growth target of 6.5 percent for this year - encouraging news for President Xi Jinping ahead of a major leadership reshuffle in the autumn.

Production rose a strong one percentage point from May. New orders in the month also rose to 53.1 from May's 52.3, with export orders putting on 1.3 percentage points to 52.0 in a sign of solid external demand.

All the same, growth in Chinese factories does not appear broad-based as the struggles of smaller firms intensified compared to the relatively better-off larger firms.

Most China observers agree that Asia's giant economy has slowed in the second quarter, and recent data back expectations for a continued cooling as authorities reduce high levels of debt across many of the heavy industries, crack down on financial risks and tighten monetary conditions.

Analysts also caution against reading too much into the official PMI figures.

"We are wary of putting too much faith in the official PMIs given that they have provided false signals in the past," said Julian Evans-Pritchard, a Singapore-based China economist at Capital Economics.

The official PMI surveys showed a divergence with the private Caixin/Markit PMI manufacturing survey in May, which focuses more on small and mid-sized firms. The private survey is due to be released on July 3.

SMALLER FIRMS STRUGGLE

One worry lies with the traditional sectors, including crude oil, chemicals, and non-metal mineral, which all continued to contract during the month and the downward pressure persists, the Statistics Bureau said.

Growth in the services sector also accelerated to 54.9 in June, the highest since March, thanks to vibrant activity in commercial services and construction sectors, another official NBS survey found.

The sub-index for the construction sector rebounded 1 percent point to 61.4, likely due to an infrastructure spending spree that hit the highest in at least three years in February.

The manufacturing PMI showed that the impetus came mostly from larger firms, while small and medium sized industries struggled, suggesting SMEs may be bearing the brunt of the government's deleveraging efforts.

More than 40 percent of all companies surveyed reported financial stress, the Statistics Bureau said.

As policy makers tighten the screws on debt risks, corporates are already facing higher financing costs, which could ripple through to decisions on investment, hiring, and wages over the next year.

The real estate sector, a big contributor to economic growth, has also slowed and begun to hit property investment amid persistent curbs aimed at defusing bubble risks.

To be sure, authorities are keen not to tap on the brakes too hard lest it deals a body blow to the economy which grew a solid 6.9 percent in the first quarter.

China's central bank will hold off on further monetary policy tightening and could even slightly loosen its grip in coming months as a deleveraging drive threatens economic growth and job creation, policy insiders said.

Premier Li Keqiang told the World Economic Forum on Tuesday that China is capable of achieving its full-year growth target of 6.5 percent and controlling systemic risks despite challenges.

However, maintaining medium to high-speed long-term growth will not be easy, Li said, reinforcing broad expectations of a period of slow growth as authorities rebalance the economic drivers toward consumption and away from its reliance on exports and investment.

China's economy grew an annual 6.7 percent in 2016 - the slowest pace in 26 years.

Capital Economics' Evans-Pritchard believes the current resilience of growth will prove temporary.

"With tight monetary conditions weighing on credit growth, it will be difficult to avoid a renewed slowdown in growth later this year."

Reporting by Yawen Chen and Ryan Woo; Editing by Shri Navaratnam

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