China’s Factory Gauge Unexpectedly Rises to Highest Since 2014

(Bloomberg) -- China’s official factory gauge unexpectedly rose last month to the highest level in almost two years, suggesting the economy’s stabilization remains intact and that a weakening in July was flood-related and temporary.

Key Points

• Manufacturing purchasing managers index rose to 50.4 in August from July’s 49.9 and compared to the 49.8 median estimate of economists surveyed by Bloomberg.

• Non-manufacturing PMI stood at 53.5 compared with 53.9 in July

• Caixin Media and Markit Economics China August Manufacturing PMI fell to 50 from 50.6 in July and below 50.1 median estimate

• Numbers above 50 indicate improving conditions.

Big Picture

Floods across southeastern regions responsible for about a fifth of China’s economic output interrupted production in the summer. The rebound in August gives policy makers breathing space to push ahead with reforms of state-owned firms and cutbacks in overcapacity sectors such as coal and steel. The offshore yuan strengthened while the Australian dollar -- a proxy for China’s economy because of its shipments of raw materials -- climbed.

Economist Takeaways

"The improvement was encouraging, particularly given the significant restructuring and capacity cuts being undertaken in some key sectors such as steel production," said Rajiv Biswas, Asia-Pacific chief economist at IHS Markit in Singapore

"It’s hard to tell whether the good conditions will be sustainable," said Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong. "Monetary and fiscal policy support will not be as supportive as they were earlier this year."

“August is the beginning month of China’s manufacturing peak season, and we expect the official PMI will go higher in the coming months,” said Iris Pang, senior Greater China economist at Natixis SA in Hong Kong. “High-tech and consumer goods are doing well. It’s a positive sign that China’s manufacturing is changing from the low-value added end to the higher one.”

PMI gain gives assurance on factory stabilization, which may help limit the yuan’s downside risk, said Fiona Lim, a senior currency strategist at Malayan Banking Bhd. in Singapore.

The Details

• Measures of new orders, purchases quantity and input prices paced the PMI rebound.

• But the gains weren’t shared equally, with large enterprises reporting improved conditions even as medium and small firms deteriorated, the data showed.

• Demand is recovering, companies starting to restock and corporate confidence is climbing, the National Bureau of Statistics said in a statement released with the data.

• Difficulties remain as downward pressure on trade is still significant due to lackluster global growth and companies still face high financing, labor and transportation costs, the statistics agency said.

--With assistance from Ailing Tan Miao Han and Kevin Hamlin To contact Bloomberg News staff for this story: Xiaoqing Pi in Beijing at xpi1@bloomberg.net. To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Jeff Kearns

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