Strong manufacturing boosts China's near-term growth - analysts

03 April 2017 06:28 Source:ICIS News

SINGAPORE (ICIS)--China’s economy will likely be strengthened by industrial production growth in the first quarter but the upside is unlikely to be sustained in the months ahead given the several rounds of policy tightening implemented, analysts said on Monday.

China’s official manufacturing purchasing managers’ index (PMI) has stayed in expansionary territory in the first quarter of this year, with the index rising further to 51.8 in March from 51.6 in February, supported by growth in new orders and new export orders. The official index stood at 51.3 in January.

More notably, the employment sub-index rose to 50 in March after staying in contractionary territory for 57 months, a positive sign for the labour market, Nomura Global Markets Research said in a note.

Meanwhile, the private Caixin general manufacturing PMI fell to 51.2 in March from February’s 51.7, but still remains above the expansion/contraction threshold of 50.

The official PMI survey is geared towards bigger larger, state-owned firms, while the Caixin survey focuses on smaller companies.

“Although pointing to only a modest rate of improvement, the latest index reading remained amongst the highest seen over the past four years,” Caixin said in a statement.

China’s economy grew by 6.7% in 2016, the slowest rate of expansion in 26 years and this year’s target has been cut to 6.5%.

The Chinese economy will likely expand by 6.8% year on year in the first quarter of this year, the official Xinhua news agency cited a government think tank as saying late last month.

Industrial production growth is expected to edge up to 6.4% year on year in March from 6.3% in January-February this year, as the high output sub-index of the official PMI points to strong production, according to Nomura.

China’s economy will likely expand by 6.8% year on year in the first quarter on the back of this stronger-than-expected industrial production, it said.

With stronger signs of economic activity, the People’s Bank of China (PBoC) on 1 April increased interest rates for standing lending facility (SLF) loans, which are aimed primarily at small- and medium sized financial institutions.

The SLF is similar to the Federal Reserve’s discount window and the European Central Bank’s Marginal Lending Facility.

“Once largely reliant on benchmark rates, the PBoC has in recent years used an expanding number of instruments to guide borrowing costs and create an interest-rate corridor,” said analysts at Singapore-based UOB Global Economics & Markets Research.

The central bank earlier in Mid-March raised its short-term interest rates for the third time in as many months to counter the surge in debt levels.

Despite the continued improvement in the first few months of this year, China has “moved its foot from the gas to the brake and aims to rein in the brewing housing bubble and lean against inflationary pressure”, said Pernille Bomholdt Henneberg, a senior analyst at Danske Research, in a note.

“We believe the Chinese economy will be faced with some moderate headwinds this year, as we expect the housing market to cool and believe the significant infrastructure boost is set to fade,” Henneberg added.

The “policy effect” will kick in in the coming months and China will likely hit its growth forecast of 6.5%, Nomura added.

China’s factory output is a key bellwether for the region’s manufacturing sector as it absorbs the majority of their exports, especially in the petrochemicals industry.

South Korea’s manufacturing PMI dipped again in March to hit a four-month low amid reports that sales to China had suffered because of political tensions.

Top Image: A Chinese worker assembles cars on the assembly line at an auto plant (Imaginechina/REX/Shutterstock)

Focus article by Nurluqman Suratman

By Nurluqman Suratman