China’s small factory activity strengthened in July to highest level since January 2011

China’s small factory activity strengthened in July to highest level since January 2011

Caixin/Markit manufacturing purchasing managers’ index (PMI) rose to 52.8 in July from 51.2 in June, with a reading above 50 signifying growth

China’s manufacturing sector showed a further rebound in July to its strongest level since January 2011, but weak foreign demand and downward pressure on employment showed there is still some way to go to reach pre-coronavirus levels.

The Caixin/Markit manufacturing purchasing managers’ index (PMI), released on Monday, rose to 52.8 last month from 51.2 in June, beating analysts expectations and showing production at smaller Chinese factories was improving. The 50-point mark separates contraction from growth.

The reading was another bright spot for China’s economy following Friday’s official manufacturing PMI that indicated factory activity among larger firms improved slightly to 51.1 in July from 50.9 in June. The official non-manufacturing PMI, also released by the National Bureau of Statistics on Friday, eased to 54.2 in July from 54.4 the previous month, as a strong rise in construction was offset by a decline in service sector activity.

The Caixin index has now improved for the last three months, with China continuing to contrast sharply with the United States and Europe, both of which reported last week record contractions in gross domestic product in the second quarter.

“The Caixin China General Manufacturing PMI stood at 52.8 in July, up from 51.2 the previous month, reflecting that the manufacturing sector continued to expand amid the ongoing economic recovery,” said Wang Zhe, senior economist at Caixin Insight Group.

“Overall, flare-ups of the epidemic in some regions did not hurt the improving trend of the manufacturing economy, which continued to recover as more epidemic control measures were lifted. The supply and demand sides both improved, with relevant indicators maintaining strong momentum. However, we still need to pay attention to the weakness in both employment and overseas demand.”

The upturn has been supported by the easing of crippling coronavirus containment measures from earlier in the year, allowing more manufacturers to resume production and boosting demand.

New export orders among smaller factories continued to fall in July, amid ongoing disruptions to demand in Europe and the US, hitting its lowest level in seven months.

Employment also remained on a downward trend last month, with staffing levels declining for the seventh month running, the Caixin index showed.
“Manufacturing demand and supply continued to recover, but overseas demand remained subdued. In July, manufacturing output and demand expanded at a faster pace than the previous month, with the subindices for output and total new orders both hitting their highest levels since January 2011, as the domestic epidemic was largely under control,” added Wang from Caixin Insight Group.

“Due to the impact of the overseas pandemic, the gauge for new export orders remained in contraction territory for the seventh consecutive month. Although the pace of the contraction slowed, overseas demand remained a drag on overall demand.”

China’s economic growth rebounded 3.2 per cent in the second quarter from a year earlier, from the sharp drop of 6.8 per cent in the first quarter, the first contraction since records began, prompting the government to drop its annual growth target for the first time since 2002.

Beijing has released a flurry of stimulus measures to revive the economy, including the issuance of special treasury bonds, lower lending rates, tax exemptions and lifting the fiscal deficit ratio to 3.6 per cent of gross domestic product.

“The official PMIs released on Friday had already pointed to a robust recovery at the start of quarter three. But the Caixin index is even more upbeat and suggests that the pace of expansion in industry last month was the strongest in almost a decade,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

“The survey data are consistent with our view that policy stimulus has paved the way for a period of above-trend growth in construction and industry. In the near-term this should help offset continued weakness in consumption and services activity, allowing the economy as a whole to return to its pre-virus trend by year-end.”