China Industrial Outlook Robust Despite July Dip
The Purchasing Manager’s Index (PMI) suggests industrial production will continue strong growth despite a 29-month low. The PMI fell for the fourth straight month to 50.7 for July.
The official PMI dropped 0.2 points from June, following a 1.1 point drop from May, according to data released by the China Federation of Logistics and Purchasing (CFLP) Monday.
Taking a slighty longer-term outlook, however, the negative data is balanced by other data that suggests industrial production will see stronger growth in coming months. The new-orders component of the PMI rose from 50.8 in June to 52.1 in July, while the finished-goods inventory fell from 51.0 to 49.2.
“Historical data show that the ‘total new orders less finished goods inventory’ holds some power in forecasting PMI for the month ahead,” said Zhang Zhiwei, Nomura’s chief economist for China, predicting that the PMI will reverse its downtrend in coming months.
Cai Jin, deputy director of the CFLP, said the smaller decline signals that economic growth is stabilizing and will accelerate for the rest of the year.
Industrial production in June rebounded surprisingly despite weak PMI data in the past several months. If industrial production remains strong in July, the government is more likely to stay focused on controlling inflation rather than promoting growth.
The seasonally adjusted HSBC PMI, also released Monday, fell to 49.3 from 50.1 in June, the lowest since March 2009. It signaled deterioration in manufacturing sector operating conditions for the first time in a year. Weak global demand is seen reflected in a flatterning new order growth.
“The current level of the PMI is still consistent with a 12 to 13 percent growth rate of industrial production, which leaves room for Beijing to maintain its tightening policy through the third quarter to check inflation,” said Qu Hongbin, chief economist for China and co-head of Asian economic research at HSBC.
From the central government’s perspective, the most worrisome figure remains the 6.4 percent jump in consumer price index, a three-year high. To soak up liquidity and curb inflation, the central bank has raised interest rates three times and hiked the reserve requirement for commercial lenders six times this year.
On Monday the central bank emphasized that it remains focused on coping with anticipated strong inflationary pressures, according to its website.
“Once the policies loosen, the prices are likely to rebound,” it said, pledging to keep price stability as its top priority.
It also highlighted the need to encourage banks to support small and medium-sized enterprises (SMEs) while controlling total credit. Some SMEs in the coastal region are still struggling.