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China Factory Stabilization Shows Little Need for Added Stimulus

May 1, 2016
The manufacturing purchasing managers index showed growth which stemmed in part from a surge in old growth drivers such as steel, infrastructure and properties.

With new data suggesting that China’s economy stabilized in April amid a property recovery and credit surge, analysts say there is little need for stepped-up monetary easing in the immediate future.

China’s official factory gauge, the manufacturing purchasing managers index, stood at 50.1 in April, the nation’s statistics agency said on May 1.  That is the second consecutive month the indicator has moved above 50, which indicates improving conditions. The non-manufacturing PMI, which signals conditions at services and construction firms, slid slightly to 53.5 last month after a big jump in March.

The stabilizing readings eased urgency to add monetary stimulus, which risks fueling housing prices or flooding overcapacity sectors such as steel or coal with cheap credit. Maintaining the pace of growth in China while reining in overcapacity is the delicate balance the government is trying to strike this year, and it is ready to pull the trigger again on further stimulus if signs indicate a sharp slowdown.

“The near future is an observation period for the stimulus package,” said Ming Ming, a Beijing-based fixed-income analyst at Citic Securities Co. “There won’t be any big moves temporarily. Risk in the financial markets -- including commodities, property and bond markets-- is the focus right now.”

The manufacturing PMI compared with 50.2 in March and a median estimate of 50.3 in a Bloomberg News survey of economists. That indicates a slight weakening from the strong, unexpected jump seen in March. The sub-index of new orders in April stood at 51, indicating a rebound, while that of new exports and imports dropped, and the employment gauge showed that factories are reducing staff.

“Monetary policy will remain supportive in general, while some sort of management, such as targeted tightening in the property market, is possible at some point,” said Zhou Hao, a Singapore-based economist at Commerzbank AG.  “The Chinese government only rolls out some short-term stimulus when the data are at the worst. It doesn’t want to see all the steel mills firing up again or the market’s speculation momentum get too strong.”

China had an across-the-board rebound in March as corporate profits jumped, and new credit, investment, industrial output and retail sales beat economists’ estimates. Those stronger readings may have the central bank hold off on stimulus for a while. Economists see the People’s Bank of China keeping the benchmark one-year lending rate at a record low 4.35% through the third quarter, before cutting it to 4.1% in the fourth.

Lending, Construction

The resilience of data stemmed in part from a surge in old growth drivers such as steel, infrastructure and properties, according to Bloomberg Intelligence economists Tom Orlik and Fielding Chen. “Once again, China’s return to growth has come through a revival in lending and construction -- at the expense of progress on deleveraging and re-balancing,” they wrote.

Additional lending may keep factories humming longer, yet risks building up debts and adding to redundancies at “zombie firms” that are kept alive by banks’ rollovers. The PBOC signaled less appetite for stimulus last month after the release of economic growth data in the first quarter.

Still, it’s probably too soon to call a stop to further easing by the PBOC.

“A combination of improving growth data in March, substantial stimulus already in the system, and official hints that ‘prudence’ is now the priority, has trimmed bets on additional stimulus,” Orlik and Chen wrote. “That makes sense, but with April’s growth data so far uninspiring, it’s too early to make a definitive call on a shift in policy.”

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