China Early Data Signal That Growth May Have Peaked for 2017

(Bloomberg) -- The earliest indicators for China’s economy in June signal that the manufacturing sector may be poised to decelerate, while other challenges loom in the second half of this year.

Small- and medium-sized enterprises showed the lowest level of confidence in 16 months, a gauge of manufacturing drawn from satellite imagery slumped, and conditions in the steel business remained lackluster. There’s some good news though: sales-manager sentiment stayed positive, and outlook of financial experts recovered.

Output in the world’s second-largest economy has softened in the second quarter after a strong start to the year, with investment slowing, some credit becoming tighter and evidence emerging that administrative curbs on the property market are starting to bite. If the slowdown worsens in the coming months, the government’s resolve to curb risk in the banking sector could be tested during a period of leadership transition in Beijing.

Here’s what June’s earliest indicators show:

Smaller Businesses

Standard Chartered Plc’s Small and Medium Enterprise Confidence Index slumped to a 16-month low of 54.7, signaling smaller companies are finding it harder to obtain credit as regulators move to damp financial risks. A sub-gauge of lending fell below 50, signaling deterioration, for the first time on record, bank economists Kelvin Lau and Hunter Chan wrote in a note.

That indicates banks are more hesitant to lend to smaller companies, leaving them in line to bear the brunt of the tightening, Lau and Chan wrote. “Although the central bank will likely provide sufficient liquidity to avoid a liquidity crunch, banks may still prefer lending to bigger rather than smaller companies amid tighter liquidity conditions,” they said.

Satellite View

The outlook from orbit also looks weaker. Manufacturing signaled deterioration for the first time since August, according to the China Satellite Manufacturing Index, which fell to 49.6.

The reading published by San Francisco-based SpaceKnow Inc. uses commercial satellite imagery to monitor activity across thousands of industrial sites. Readings above 50 signal improving conditions, while those below indicate deterioration.

Tepid Steel

The S&P Global Platts China Steel Sentiment Index remained at a lackluster level -- 38.12 out of 100 points. The gauge is based on a survey of about 75 to 90 China-based market participants including traders and steel mills.

"Market participants do not expect any great improvement over the coming month," Paul Bartholomew, a senior managing editor at S&P Global Platts in Melbourne, wrote in a release. "Confidence in the export market has evaporated after two stronger months, as overseas customers are wary about buying when the price direction is so unclear.”

Sales Managers

Sales managers are more upbeat. A survey-based sentiment gauge climbed to a 20-month high of 52.5, according to London-based research firm World Economics Ltd.

"We will see a small uplift overall, nothing dramatic," Chief Executive Ed Jones wrote in an email. "If the upwardly growing trends in market growth and sales growth persist then the outlook is positive."

Financial Experts

International investor confidence in the Chinese outlook recovered this month from May, according to a survey of the China Economic Panel, a joint project of The Centre for European Economic Research (ZEW) in Mannheim, Germany, and Fudan University in Shanghai.

The ZEW index on investor expectations for the economy in the next 12 months rose to 9.7 from minus 0.1 in May -- still lower than April’s 17.1 reading.

To contact Bloomberg News staff for this story: Xiaoqing Pi in Beijing at xpi1@bloomberg.net.

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Jeff Kearns

With assistance from Xiaoqing Pi