Tags: China | economy | manufacturers | expansion

China Sees Economy Stabilizing as Manufacturers Signal Expansion

Sunday, 02 June 2013 01:11 PM

China's government indicated a slowdown in the world's second-largest economy is bottoming out, underscoring forecasts for policy makers to avoid cutting interest rates this year.

President Xi Jinping said expansion is on a "more stable footing," the Xinhua News Agency reported Friday. An official manufacturing index released Saturday showed a pickup in growth, rising to 50.8 in May from 50.6 in April, after a separate gauge last week signaled a contraction.

Stabilization in Chinese industry adds to signs of strengthening in Asia after Japan last week reported an advance in factory output and South Korean industrial production and exports unexpectedly increased. A Bloomberg News survey of economists showed the People's Bank of China is more likely to raise interest rates than cut them in the coming year.

"The positives are still outweighing the negatives in manufacturing -- credit is supportive, housing is recovering and the inventory cycle is turning," said Stephen Green, head of Greater China research at Standard Chartered Plc in Hong Kong. "By the end of the year we'll have inflation running at about 4 percent and more evidence the economy is doing better."

Standard Chartered estimates one 25 basis-point increase in lending and deposit rates in the fourth quarter and two in the first half of next year, taking one-year borrowing costs to 6.75 percent and savings rates to 3.75 percent by end-June 2014.

'Sound' Fundamentals

Consumer prices rose 2.4 percent in April from a year earlier, the fourth straight month of gains below the government's 2013 target of 3.5 percent. Seven out of 24 analysts in a Bloomberg News survey last month estimated inflation will accelerate to 4 percent or above in the fourth quarter.

President Xi said the fundamentals of the Chinese economy are "sound," according to the English-language transcript of a written interview released by Xinhua before his visit to Latin America and the Caribbean. Domestic demand, especially consumption, is playing a bigger role in driving growth, employment is stable and incomes are rising, he said.

The PMI reading released Saturday by the National Bureau of Statistics and China Federation of Logistics and Purchasing in Beijing was higher than all estimates in a Bloomberg News survey of 30 analysts and compares with the median projection of 50, which marks the dividing line between expansion and contraction.

The Shanghai Composite Index, China’s benchmark stocks gauge, fell 0.7 percent on Friday amid concern the official PMI would decline.

"Markets' fear of a further growth slowdown will be alleviated and we expect a positive market reaction," Lu Ting, head of Greater China economics at Bank of America Corp. in Hong Kong, said in a Saturday research note.

Steel Profits

HSBC Holdings Plc and Markit Economics on Monday will give the final May reading of their manufacturing index which surveys fewer companies and is weighted toward smaller, private businesses. The preliminary figure released May 23 was 49.6, down from a final 50.4 in April, signaling the first contraction in seven months.

The official PMI data "do not seem to jive well with the reality the Chinese enterprises are facing," said Liu Li-Gang, chief Greater China economist at Australia & New Zealand Banking Group Ltd., citing as an example the decline in profits of steel mills. Inconsistency in the data risks "potentially impairing policy judgment and leading to a significant policy mistake," Hong Kong-based Liu said.

Baoshan Iron & Steel Co., China's biggest publicly traded steelmaker, lowered product prices for June delivery, according to a May 9 statement on its website, the first cut in nine months as supply exceeds demand. About 54 percent of the increase in steel output in the first four months of the year has become inventory sitting in warehouses, Wang Xiaoqi, vice chairman of the China Iron & Steel Association said last week.

Fuller Picture

Divergences in the manufacturing indexes are common given their different focus and coverage, said Wang Tao, chief China economist at UBS AG in Hong Kong. The official PMI's gauge for smaller companies fell to 47.3 in May from 47.6 the previous month, a decline Wang said is consistent with the HSBC index.

The federation releases its non-manufacturing PMI for May Monday followed by HSBC on June 5, providing a fuller picture of an economy that's increasingly reliant on service industries for growth. While both showed slower expansion in April, the official survey hasn’t dropped below 50 since a new data series started in March 2011 and HSBC’s has shown expansion for at least four years.

"Services are what's keeping the economy going at the moment," said Standard Chartered’s Green. "Job growth over the last couple of years has almost exclusively come from services and that helps explain why overall growth has been supported while cement, steel and electricity production have been weak."

Firm Support

Premier Li Keqiang said the government will step up efforts to develop service industries to "help unleash huge potential in domestic demand" and bring "firm support for stable economic growth," Xinhua reported last week, citing a speech he gave at a trade fair in Beijing.

Service industries accounted for about 45 percent of gross domestic product last year, according to statistics bureau data, up from 41 percent in 2003. The government is seeking to increase the share to 47 percent by 2015, according to its five-year plan. In the U.S., services comprise about 90 percent of the economy.

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China's government indicated a slowdown in the world's second-largest economy is bottoming out, underscoring forecasts for policy makers to avoid cutting interest rates this year.
Sunday, 02 June 2013 01:11 PM
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