Factory activity surveys in China pointed to a slight improvement in September as domestic demand picked up, but analysts believe the gains will be short-lived as the property market cools and trade tensions between the United States and China remain elevated.
Persistent weakness in China’s vast manufacturing sector has reinforced market expectations that Beijing needs to roll out more support measures to cushion the country’s worst economic slowdown in decades, even if that risks racking up more debt.
The official Purchasing Managers’ Index (PMI) rose to 49.8 in September, slightly better than expected and advancing from 49.5 in August. But it remained below the 50-point mark that separates expansion from contraction on a monthly basis, data from the National Bureau of Statistics (NBS) showed.
Analysts polled by Reuters had expected the headline reading would be unchanged.
A private business survey by Caixin-Markit, also released on Monday, showed that growth in factory activity unexpectedly quickened to a 19-month high of 51.4 in September, largely due to a rise in domestic orders as government support measures kicked in.
But economists cautioned the rebound is likely to be unsustainable and forecast further economic weakness ahead.
“We believe the official manufacturing PMI may decline again, the growth slowdown could gather pace and (financial) markets could become more volatile in coming months,” economists at Nomura said in a note.
Nomura recently lowered its third-quarter growth forecast for China to 5.9 percent and its fourth-quarter view to 5.8 percent, slowing from the 6.2 percent reported in the second quarter. It cited continued US tariff pressure, slowing industrial production and signs that property investment and construction may be starting to cool.
Total new orders, including those from home and abroad, did swing back to growth in September for the first time in five months, the official PMI showed, but the expansion was marginal.
Moreover, export demand remained weak, with orders falling for the 16th straight month, albeit at a milder pace.
Production rose at a quicker pace in September, buoyed by the growth in new orders. In particular, output in the food processing, textile, special equipment and electrical machinery sectors stood at high levels, Zhao Qinghe, an official with the statistics bureau said in a statement accompanying the data.
“With a slew of growth-boosting policy measures kicking in, optimism among manufacturing firms… reached 54.4, the highest in the third quarter,” said Zhao.
The difference between the official and private PMIs is that the official one surveys 3,000 companies while the private one samples 420. The Caixin-Markit PMI also focuses on small and medium-sized manufacturers in the private sector, whereas the national survey includes state-owned firms.
The activity surveys followed unexpectedly weak August data which showed growth in industrial production tumbling to its weakest level in 17.5 years, while factory deflation deepened. Winter smog controls are expected to keep a lid on heavy industries in some parts of the country in the coming months.
“While China’s fiscal stance is unlikely to be loosened during the remainder of the year, we think the PBOC will find it an increasingly hard sell to refrain from more decisive monetary easing,” Martin Lynge Rasmussen, China Economist at Capital Economics said in a note, adding that the better PMIs were likely a false dawn.
The Peoples’ Bank of China has lowered banks’ reserve requirements seven times since early 2018 to free up more funds for lending. China also trimmed its new benchmark lending rate in September for the second month in a row.
But analysts note monetary policy easing has been more cautious than in past downturns, likely due to concerns about rising debt and financial risks, particularly involving the property market.
Export-oriented manufacturers are particularly vulnerable as the nearly 15-month China-US trade war shows no signs of ending.
Top-level trade negotiators from the two sides are expected to meet in Washington on October 10-11 to determine if they can agree a truce in their trade war, but most analysts doubt a durable agreement can be reached.
Higher US tariffs on Chinese goods are due to take effect in mid-October and mid-December, and sources told Reuters the Trump administration is considering radical new pressure tactics on Beijing, including the possibility of delisting Chinese companies from US stock exchanges.
With business uncertainties clouding the outlook, the official survey showed Chinese factories continued to cut jobs in September. The employment sub-index was at 47.0 versus 46.9 in August.
A separate survey showed services sector activity remained well in expansionary territory, but construction growth eased, with a sub-reading for construction activity standing at 57.6, down from 61.2 in August. Beijing recently tightened financing for property developers.
The non-manufacturing PMI in September was at 53.7, slightly down from August’s 53.8.
Beijing is counting on a strong services sector to cushion the impact of trade uncertainties and factory job losses. But the sector began showing signs of cooling late last year amid the broader economic slowdown.