China Factory Momentum Gains in June on Back of Trade Rebound

(Bloomberg) -- China’s official factory gauge concluded the first half of the year on a robust note, the latest evidence of stable momentum that gives policy makers room to continue defusing financial risks.

Key Points

• The manufacturing purchasing managers index increased to 51.7 in June, beating all estimates compiled by a Bloomberg survey of economists, and the 51.2 reading in May
• The non-manufacturing PMI rose to 54.9 compared to 54.5 a month earlier
• New export orders rose to 52.0, the highest level since April 2012 
• Numbers higher than 50 indicate expansionary conditions; below 50 signals contraction

Big Picture

Economic activity this year has proven more resilient than expected, giving policy makers time to focus on reining in financial risks and cooling a frothy property sector. Firmer global trade is boosting corporate profits and hiring, easing fears -- for now -- that efforts to cut excessive financial borrowing could derail the government’s target of 6.5 percent expansion in output.

Companies are assuming that curbs on excess leverage and the property sector will be transient this year, as the Communist Party won’t allow much economic pain before the leadership transition in the fall, according to a report published by research firm CBB International this week.

Economist Takeaways

"It means that momentum in the economy continues to be robust and we’ll have only a gradual slowdown at worst in the coming quarters," Dariusz Kowalczyk, a senior emerging-market strategist at Credit Agricole CIB in Hong Kong, said in a Bloomberg Television interview. "China is doing very well."

China’s manufacturing PMI reached its second highest level this year on the back of improving market sentiment and industrial upgrading, according to an NBS statement posted on its website. Pharmaceuticals, electrical and mechanical equipment manufacturing sectors performed especially well, while some traditional industries such as petroleum processing are under pressure, according to the statement.

"Stronger foreign demand is helping to support manufacturing activity," Julian Evans-Pritchard, China economist at Capital Economics Ltd. in Singapore, wrote in a note. "The price components both increased for the first time since December, suggesting that downward pressure on producer prices may now be easing."

The Details

• New orders climbed to 53.1 from 52.3 in May
• Business activity expectations rose to 58.7 from 56.8 in May
• Steel industry PMI for June eased to 54.1 from 54.8
• Conditions at large and medium-sized enterprises diverged; larger firms index rose to 52.7 from 51.2 while medium business index slipped to 50.5 from 51.3
• Services’ role in stabilizing the economy was reinforced; Delivery index rose to 72.2 aided by mid-term online sales promotions

To contact Bloomberg News staff for this story: Jeff Kearns in Beijing at jkearns3@bloomberg.net, Yinan Zhao in Beijing at yzhao300@bloomberg.net, Miao Han in Beijing at mhan22@bloomberg.net, Xiaoqing Pi in Beijing at xpi1@bloomberg.net.

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Malcolm Scott at mscott23@bloomberg.net, Andrew Davis

With assistance from Jeff Kearns, Yinan Zhao, Miao Han, Xiaoqing Pi