Difficulties Facing Chinese Manufacturers Continue Despite Policy Support

Latest NBS Manufacturing PMI figures suggest that difficulties facing China’s manufacturing sector continue despite policy support, according to CCB International Research.

July NBS Manufacturing PMI came in at 49.9, slightly below market consensus and the June reading of 50.0. July production was the main factor behind the moderation, dropping to a five-month low of 52.1, in line with the soft reading in the New Order Index for the last few months.

The New Orders Index fell for the fourth consecutive month in a row, suggesting soft demand amid external uncertainties and continued domestic overcapacity corrections. In this connection, the New Export Order Index dipped to a five- month low, reflecting a dimmer global demand outlook post the Brexit vote.

Divergence still continues

Meanwhile divergence among economic sectors is still visible: public investment-related sectors, high tech sectors, and services remain supported, and overcapacity sectors continue to trend down, according to CCB.

Both the Import Index and Raw Materials Inventory picked up from the previous month’s low, and the Purchasing Price Index also rose 3.3ppt to 54.6, suggesting solid demand for commodities. PMI for hi-tech manufacturing rose to 53.2 in Jul, marking a new high this year.

Non-manufacturing PMI also rose (from 53.7 in June to 53.9 in July), benefiting from upbeat financial and travel business. Meanwhile, PMI for energy-intensive manufacturing, such as non-metallic mineral products and ferrous metal processing, was 47.7 in Jul, down 0.5 from June.

The CCB report noted that the strength of the “new economy” is also corroborated by the Caixin manufacturing PMI, which posted a significant rebound to 50.6 in July, marking the first above-50 reading since Feb 2015.

Citing Caixin’s release, the CCB said the improvement was led by a recovery in new business, thanks to the introduction of new products and a change of marketing strategy. In contrast to resilient domestic demand, export-related sales remained soft.

The softer-than-expected data is in line with our broad assessment that ongoing adjustment of the economy will pose continued headwinds to the manufacturing sector in the near term. External uncertainties would add to this pressure.

Meanwhile the rise in commodity prices and concern over a property price bubble is likely to keep the PBoC on the sidelines and hold back further monetary stimulus. Fiscal expansion, particularly through public investment, remains the keystone of policy support in the near term.  

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