China’s factories hummed at a faster clip in July as manufacturers stepped on the throttle following a recovery in external demand and infrastructure spending.
The country's closely watched Purchasing Managers' Index (PMI), a key gauge of manufacturing activity, has bounced back after measures to curb the coronavirus caused a dramatic plunge in February, and performed better than expected over the last month.
The PMI of the world's second-largest economy came in at 51.1 points in July, up from 50.9 the month before.
“The continued strength in manufacturing and construction readings, coupled with the Politburo quarterly economic meeting yesterday, confirmed that cyclical policy is now on cruise control,” said Jenny Zhang, Zhipeng Cai and Robin Xing, Morgan Stanley analysts said in a note.
“While the pace of improvement may moderate in coming months after a V-shaped rebound in 2Q, economic recovery is on the right track amid normalising external demand and domestic service. We see ongoing rollout of fiscal stimulus, neutral monetary policy and fine-tuning of housing lending policy towards less accommodative.”
A Bloomberg poll had expected a reading of 50.9. A number above 50 represents growth while anything below that shows contraction.
Non-manufacturing PMI came in at 54.2 points, down from 54.4 in June and slightly worse than expected.
Zhao Qinghe, senior statistician at the National Bureau of Statistics (NBS), said production had "generally rebounded" and demand had "gradually warmed up".
"With the gradual relaxation of quarantine and lockdown measures, and resumption of economic activities in major economies around the world... the import and export of manufacturing industries have picked up," Zhao said.
New export orders rose significantly by 5.8 percentage points to 48.4, a four-month high and close to the pre-lockdown level.
"This suggests China's export activity will likely stay resilient in coming the months, despite some softening in July's regional exports shown in early data from Korea (first 20 days) and Vietnam," Barclays economists said in a note.
"Overall we think the improving manufacturing PMI supports our constructive H2 outlook mainly in view of sustained exports resilience and rising infrastructure investment growth."
Some small firms hit by flooding
However, he said the PMI for small firms remains below expansion at 48.6, with some hit by the severe flooding that has deluged the country in recent months.
"Small companies continue to face pressure on both supply and demand," Zhao said.
"Some enterprises... reported that flood-related disasters caused disruptions to logistics and transportation, along with problems like flooding in plants, equipment and inventory."
Goldman Sachs analysts warned the recovery pace was uneven however, as smaller-sized manufacturing enterprises still lag behind larger enterprises.
“In yesterday's politburo meeting, policymakers reiterated the need to provide more targeted support to the economy,” they said in a report, while adding that the politburo meeting statement did not mention the need to cut RRR and interest rates.
However, Friday’s data release has prompted analysts to curb their expectations about further support measures.
Nomura’s Chief China Economist Ting Lu said Beijing may be reluctant to roll out fresh stimulus measures in H2, although it would not curtail easing and stimulus measures introduced in H1.
“We remove our forecast of a 100bp reserve requirement ratio (RRR) cut in Q3 while maintaining our forecast of a 50bp RRR cut in Q4. In this regard, we officially lower our forecast for RRR cuts before year-end to 50bp from the previous 150bp. In the meantime, we move our forecast of a 10bp medium-term lending facility (MLF) rate cut in Q3 forward into Q4,” Lu said.
With reporting by AFP