MNI: China PMI Shows Stimulus Working But More Needed-Analysts

The better-than-expected performance by China’s manufacturers in August shows recent rate cuts and fiscal stimulus are starting to have an effect, but more official measures will be necessary to boost demand, analysts told MNI.

The official manufacturing purchasing managers' index (PMI) rose to 49.4 in August from July’s three-month low of 49.0, slightly beating expectations for 49.2 but remaining below the 50 point which separates contraction from expansion for a second month running, as Covid-19 outbreaks and power rationing amid heatwaves weighed on production and logistics.

Though short-term drags from power cuts and high temperatures are expected to ease, weak demand remains a constraint, said Chi Guangsheng, analyst at Essence Securities.

Both the new order and export order sub-indices were up 0.7 percentage point from the previous month to 49.2 and 48.1, respectively, with Wen Bin, chief economist at China Minsheng Bank, saying that pro-growth policies enacted since August may have begun to kick in.

The large manufacturers PMI, often the first to feel the benefits of policy measures, took the lead, rising above the 50 mark. But small manufacturers remain under pressure, with their PMI sliding by another 0.3 pp to 47.6. The Caixin manufacturing PMI, which mainly tracks small and medium-sized manufacturers, showed a similar trend, dropping 0.9 pp on the month in August back into the contraction zone at 49.5, with both the new orders and new export orders sub-indices slipping below 50 after two months of expansion.

WEAK CREDIT DEMAND

On Wednesday, the State Council urged local governments to roll out detailed plans to further boost economic activity by the first half of September if possible. Measures are likely to focus on accelerating infrastructure construction with increased funding support and allowing cities to customise their own mortgage policies to fuel demand for housing, according to Wen.

But weak demand for credit may limit further reductions in policy interest rates, according to Sheng Songcheng, a former director of the Statistics and Analysis Department at the People’s Bank of China. The PBOC is unlikely to enter a rate cut cycle now, so to avoid creating excessive interbank liquidity and as the Federal Reserve tightens, Sheng told a forum on Monday.

The official non-manufacturing PMI, which measures business sentiment in the services and construction sectors, fell by 1.2 pp to 52.6 in August, with services activities declining by 0.9 pp to 51.9.

Construction activity was also disrupted by hot weather in August, falling 2.7 pp to 56.5, lower than in previous years and possibly weighing on infrastructure investment growth, according to Zhang Yu, chief macro analyst at Huachuang Securities.

Civil engineering and housing construction PMIS dropped by 1.0 and 3.6 pp respectively, said Xiong Yuan, chief economist of Guosheng Securities, who said that the real estate downturn and continuing pandemic disruption are two key obstacles for China to achieving 4% GDP growth this year.