NE Asia August industry conditions improve; China PMI at 51.7

SINGAPORE (ICIS)–Manufacturing conditions across northeast Asia improved in August led by China – which registered a higher official purchasing managers’ index (PMI) reading of 51.7 – amid a broad recovery in exports, but downside risks persist, analysts said.

Higher production and new orders drove up China’s official PMI in August from 51.4 in July. Based on a separate survey of smaller manufacturers in the country, Chinese media group Caixin generated an August PMI reading of 51.6, up from 51.1 in July.

The PMI is a barometer of an economy’s manufacturing performance, with a reading of 50 and above indicating expansion.

New business in China posted its strongest increase in more than three years, Caixin said in a joint statement with its partner IHS Markit, a financial information services provider that compiled the survey.

“Firmer foreign demand was a key driver of new order growth, with export sales rising to the greatest extent in over seven years in August,” it said.

As a result, Chinese firms expanded their production and buying activity, while business confidence rose to its highest level in five months, according to Caixin.

“Overall operating conditions of the manufacturing sector improved further as market demand strengthens, but if prices rise too quickly the profitability of companies in the middle of a supply chain may be under pressure,” said Zhengsheng Zhong, director for macroeconomic analysis at research firm CEBM Group.

China is the largest emerging economy in Asia and the world’s second-biggest economy.

East Asia as a whole had solid wage growth this year, backed by strong global demand, according to Spain-based FocusEconomics in its September Consensus Forecast.

While the regions’s economy is “sailing smoothly”, some downside risks could derail the region’s stellar performance, it said.

“Incoming data for China shows that the economy entered H2 [second-half] on a weaker footing,” FocusEconomics said.

While a managed deceleration in China is beneficial for the country and, consequently, for the region, an abrupt slowdown would reverberate across east and south Asia, it said.

The Chinese economy showed some signs of fatigue at the start of the third quarter as weather-related disruptions, a cooling property market and authorities’ efforts to curb shadow banking and enforce financial deleveraging are gradually impacting economic growth, according to FocusEconomics.

While growth in China will remain elevated, slightly-weaker dynamics will exert downward economic pressure on east Asian economies, it said.

Japan, which the world’s third-biggest economy, had a 52.2 reading in August PMI, up from 52.1 in July, backed by expansions in output, new orders and employment, based on Nikkei’s readings.

Japan’s manufacturing sector has stayed on expansion mode, with readings above 50 for the past 122 consecutive months.

“August’s survey showed growth moving broadly sideways, maintaining the recent positive trend of improvement in the health of the manufacturing sector,” said IHS Markit director Paul Smith.

“The latest expansion was also balanced in terms of demand sources, with sales to both domestic and international clients (especially in China) reported to be up,” he said.

Resilient global growth and improving domestic demand are propping up Japan’s economy this year, FocusEconomics said.

“However, mounting geopolitical risks could lead the yen to appreciate, hurting the external sector. [FocusEconomics] Analysts see the economy growing 1.4% this year, which is up 0.1 percentage points from last month’s projection. For 2018, they see growth at 1.0%.”

North Korea conducted a nuclear test on 3 September, a move that Japanese Prime Minister Shinzo Abe slammed as “absolutely unacceptable”, according to media reports.

This followed a firing of a ballistic missile by North Korea over the Japanese northern island of Hokkkaido into the sea in August.

In South Korea, manufacturing PMI in August was just shy of crossing to expansion mode at 49.9, improving from 49.1 in July, according to a survey of manufacturers conducted by Japanese media firm Nikkei, in partnership with IHS Markit.

Overall new orders in the country inched up for the third month in August, buoyed up by a return to growth of new export orders, it said.

“While total new orders rose for the third month running, a marginal expansion of new export business was the first since January. This illustrated higher client demand from other Asian countries,” it said.

FocusEconomics noted that the South Korean economy is expected to slow down in the second half of the year with no resolution yet to its dispute with China, its major export market, over security issues.

“Although an open war in the Korean peninsula is highly unlikely, persistent diplomatic tensions and military threats have the potential to erode business sentiment in Korea,” the research firm said.

In Taiwan, the headline Nikkei manufacturing PMI in August rose to a four-month high of 54.3 in August, up from 53.6 in July.

Total new orders increased at a quicker pace than in the previous month, helped by a further spike in new export business, according to Nikkei.

“Stronger demand in regions such as China, Europe and the US underpinned the latest rise in export sales,” it said, citing panelists in the PMI survey.

However, the manufacturing sector continues to be held back by product shortages, which have led to further delays in delivery times, according to IHS principal economist Annabel Fiddes said.

“Nonetheless, the sector continues to show a marked comeback since late last year, with IHS Markit forecasting [Taiwan’s] real GDP to expand by around 2.2% in 2017, up from 1.5% in 2016,” she said.

Focus article and interactive by Nurluqman Suratman

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