China PMIs Unexpectedly Accelerate Despite Ongoing Employment Contraction
Validating the recent surge in iron ore, which has jumped more than 18% from 2017 lows hit just two weeks ago on speculation the PBOC may be willing to flirt with another round of inflation, overnight Beijing reported an unexpectedly strong bounce in its manufacturing and service sectors.
China’s NBS June manufacturing PMI came in at 51.7 for June, above both the previous reading of 51.2 and expectations of a 51 print, remaining comfortably above the 50-point expansion line. This was the second highest level of 2017, on the back of improving market sentiment and industrial upgrading, according to an NBS statement posted on its website, despite an ongoing troubling contraction in the employment subindex. Unlike the Caixin PMI, the official index tracks mostly larger, state-owned enterprises.
Two key sub-indices both increased from the previous month, although ominously the employment index declined for one more month and remained in contraction territory:
- The production sub-index went up to 54.4 in June, higher than 53.4 in May.
- The new order sub-index also increased to 53.1 in June from 52.3 in May.
- The employment index slightly declined to 49.0 in June, from 49.4 in May.
Both inflation indicators were higher, as the input prices index rose to 50.4 from 49.5 in May, and the output price index rebounded to 49.1 from 47.6 in May after three consecutive months of decline. Trade indicators were stronger: Both the new export order index and the import index increased by more than 1.0 pt, reaching 52.0 and 51.2 respectively. Raw material inventory inched up (to 48.6 vs. 48.5 in May) but finished goods inventory declined (to 46.3 vs. 46.6 in May). The suppliers’ delivery times suggested longer delivery times (which imply better demand conditions) – it fell for a third consecutive month in June, from 50.2 in May to 49.9.
“Stronger foreign demand is helping to support manufacturing activity,” Capital Economics’ Julian Evans-Pritchard wrote. “The price components both increased for the first time since December, suggesting that downward pressure on producer prices may now be easing.”
Separately, the official non-manufacturing PMI (comprised of the service and construction sectors at roughly 80%/20% weights) also surprised to the upside, rising to 54.9 in June from 54.5 in May. Services PMI rose to 53.8 from 53.5 in May, while construction PMI climbed to 61.4 from 60.4 in May.
The stronger than expected numbers “mean that momentum in the economy continues to be robust and we’ll have only a gradual slowdown at worst in the coming quarters,” Dariusz Kowalczyk of Credit Agricole in Hong Kong, said in a Bloomberg Television interview. “China is doing very well.”
As Bloomberg notes, economic activity this year has so far proven more resilient than expected – likely on the heels of the loan explosion at the start of the year which has since been tapered alongside China’s shadow banking crunch – giving policy makers time to focus on reining in financial risks and cooling a frothy property sector. Firmer global trade is boosting corporate profits and hiring, easing fears – for now – that efforts to cut excessive financial borrowing could derail the government’s target of 6.5% expansion in output.
Companies are assuming that curbs on excess leverage and the property sector will be transient this year, as the Communist Party won’t allow much economic pain before the leadership transition in the fall, according to a report published by research firm CBB International this week.
Goldman adds that judging from the NBS PMIs, June activity growth appeared to be healthy, however it adds that one caveat is that China’s mfg PMI trends seem to be at least slightly distorted by prices – thus the increase in output prices in June might have flattered somewhat the pickup in the headline PMI reading.
The Caixin manufacturing PMI release next Monday will give another early gauge of activity momentum in June.