China Factory Outlook Improves in September Ahead of U.S. Talks

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China’s manufacturing sector improved in September on an uptick in new orders and infrastructure spending, but with the data showing factories still contracting and other indicators pointing to economic weakness, it’s not unalloyed good news for policy makers.

The manufacturing purchasing managers’ index rose to to 49.8, according to data released by the National Bureau of Statistics on Monday. That’s better than forecast in a survey but the fifth month it’s been below the 50 level which divides expansion from contraction. The gauge for output rose to 52.3, new orders returned to expansion and new export orders improved but were still in contraction zone.

Along with the trade war with the U.S., China’s leaders are contending with rising food prices and a domestic economy which continues to slow. So far they have continued their policy of limited and targeted stimulus measures to prevent a rerun of the debt-fueled bubbles of the past, but if there is no turnaround in growth the pressure to do more will continue to grow.

“It is a small, unexpected rebound in the downward cycle, and the overall outlook is still grim,” said Zhou Hao, a senior emerging markets economist at Commerzbank AG in Singapore. “It is a bit better than expected, maybe due to the end-of-quarter factor, but the market won’t take it as a signal of a turning point.”

An improvement in relations with the U.S. helped boost the numbers, according to Tommy Xie, an economist at Oversea-Chinese Banking Corp in Singapore. In September, the U.S. postponed by two weeks the next round of tariff increases and China has restarted large-scale purchases of U.S. agricultural goods.

Vice Premier Liu He and other senior officials are expected to meet with their U.S. counterparts for trade talks Oct. 10-11, days before the next scheduled rise in U.S. duties on Chinese goods. After the recent goodwill gestures by both sides there is some hope of a possible deal in the trade war that is dragging on the global economy, but there has been no clear progress in more than a year of talks.

There may have been some front-loading of exports by Chinese firms in September, but a further escalation in the conflict is likely, according to Lu Ting, chief China economist at Nomura Holdings Inc. Due to that and an expected slowdown in property investment growth, the PMI rebound is unsustainable, he wrote after the data.

The non-manufacturing PMI gauge fell slightly to 53.7, while a separate manufacturing PMI focused more on smaller, export-orientated firms rose one point to 51.4, the highest reading in more than a year. The improved results come after economic activity slowed in August, with industrial output growing at the slowest pace for a single month since 2002. A set of early data collated by Bloomberg showed that trend continuing in September.

What Bloomberg’s Economists Say...

The improvements probably don’t reflect any genuine improvement, and China’s growth is likely to continue to slow, pressured by both external and domestic headwinds. It’s doubtful how sustainable this rise is.

-- David Qu, economist

For the full note, click here.

China has been taking some steps to keep growth humming. The central bank cut the amount of cash banks must hold in reserve this month to the lowest level since 2007, though it is still holding off on cutting borrowing costs more broadly. Analysts expect more support coming from fiscal spending, with People’s Bank of China Governor Yi Gang saying last week that China is “not in a rush” to ease monetary policy massively.

Infrastructure Push

Infrastructure spending by local governments has supported growth, and the administration sees that continuing. The key is to ensure capital from all sources is put to good use, Ning Jizhe, head of the economic planning agency, said last week.

New construction orders in the PMI data rose 1.2 points to 55.1 due to rising infrastructure investment pushing up construction demand, according to a statement on the website of China Logistics Information Center, which helps compile the PMI data. “It is expected that in the fourth quarter, infrastructure investment will continue to recover, contributing to economic stabilization,” according to the statement.

However, all the new bonds used to pay for the infrastructure spending should have been sold by the end of September. OCBC’s Xie thinks the government may bring forward the 2020 bond quota to this year so local governments can continue to sell debt over that period.

China has a 7-day national holiday from Oct. 1. While that may have boosted the data in September, it will then suppress output in October, as many business will shut down.

--With assistance from Tomoko Sato.

To contact Bloomberg News staff for this story: James Mayger in Beijing at jmayger@bloomberg.net;Miao Han in Beijing at mhan22@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger, Karthikeyan Sundaram

©2019 Bloomberg L.P.

With assistance from Bloomberg