China’s factories hummed along in August, indicating a broader recovery as manufacturers stepped up hiring to clear the backlog of export orders, a private survey showed on Tuesday.
The private Caixin and IHS Markit survey, which features a bigger mix of small- and medium-sized firms, showed a rise to 53.1 last month from July's 52.8, marking the sector's fourth consecutive month of growth and the biggest rate of expansion since January 2011. Analysts had expected a reading of 52.6.
“All sub-indexes implied stronger growth momentum in the manufacturing sector, with the production and new orders sub-indexes both at the highest levels since January 2011,” Goldman Sachs economists said in a note.
The world's second-biggest economy has largely managed to bounce back from the coronavirus crisis, and the emerging bright spot in the forward-looking gauge of export orders could herald a more durable and broad-based recovery for the Chinese economy in the months to come.
Although the labour market remained in negative territory for the eighth straight month, there were signs of improvement, with some companies increasing recruitment to meet production needs.
“In August, backlogs of work expanded at a faster pace than the previous month, which could be seen as a positive signal that a turning point is approaching for employment,” Wang Zhe, senior economist at Caixin Insight Group, said.
"Employment remained an important focus. An expansion of employment relies on long-term improvement in the economy. Macroeconomic policy supports are essential, especially when there are still many uncertainties in domestic and overseas economies," said Wang.
Chinese factories also reported the first increase in new export orders this year in August as overseas countries eased Covid-19 restrictions to kick start their economies. The pick-up in business also led to a further expansion in production, marking the sharpest gain in almost a decade.
“This (exporter order component of the index) suggests that foreign demand is now beginning to catch up to domestic demand and hints at a further acceleration in export growth in the coming months,” Julian Evans-Pritchard and Sheana Yue, economists at Capital Economics, said.
“In the near-term, we think continued policy stimulus should keep industrial growth strong. And with yesterday’s official survey suggesting that service sector growth is also accelerating, this should allow the economy as a whole to return to its pre-virus trend by year-end,” they said.
This follows official data published on Monday which showed sustained recovery in the world’s second largest economy. China’s official manufacturing Purchasing Manager's Index (PMI) for August showed a reading of 51, above the 50-mark that implies growth, although it was slightly below July’s figure of 51.1. The official PMI survey typically polls a large proportion of big businesses and state-owned companies.
“Both the NBS and Caixin manufacturing PMIs signalled continued recovery in the manufacturing sector in August, and the Caixin manufacturing PMI has outperformed the NBS one since May,” said Goldman Sachs economists, who consider the Caixin manufacturing PMI more closely linked to export growth. They said the outperformance of the Caixin manufacturing PMI vs the NBS manufacturing PMI hints at continued strength in export growth in August.
A mirror factory in the Chinese city of Yiwu, which supplies to retail giants such as Walmart and Home Depot, has been inundated with new business beyond the factory's current operating capacity, with the management sending the entire sales team down to factory floors, a 23-year-old salesman at the company told Reuters.
"We laid off workers when the pandemic first started but now, with this many orders, we cannot find enough people," said the salesman, adding that the firm was having issues booking shipments as finished goods piled up at their warehouses.
Business optimism towards the year ahead among Chinese factories remained strong overall, although it dipped slightly in August. Firms are concerned about the severity of the global pandemic over the long term.
(Additional reporting by Stella Qiu and Ryan Woo of Reuters)