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Manufacturing Outperforms and Services Underperform as China Gets June Economic Report

China Gets June Economic Report

Manufacturing outperformed expectations while services underperformed industry expectations. However, a slowing Chinese economy is finding it hard to balance risk and growth as it struggles to reinvent itself in an increasingly isolationist world.

The first half results for the Chinese economy came out last week, with the Chinese official manufacturing Purchasing Managers' Index (PMI) and the well-respected Caixin index, mostly used for small businesses, both coming out with their respected numbers. While the numbers have beaten expectations, the results are a mixed bag at best. TechSci Research experts get you the lowdown on the happenings.

The two major takeaways from the FY2017 first half report: Manufacturing sped up somewhat and services slowed down. The seasonally adjusted Caixin China General Services Business Activity Index came in at 51.6, down from May's four-month high of 52.8, in June. Levels above 50 show and expansion and levels below 50 signal a contraction, and so, while there has been some expansion in the services sector, this is still the second weakest level in the past 13 months. This however, as mentioned before, comes with the caveat.

While the Caixin PMI rose only slightly, the official services PMI for June, rose to 54.9 from 54.5 in May. While the Caixin PMI tends to focus on smaller, private companies, while the official data tends to focus on larger, often state-owned companies. China’s factories however, grew at a faster rate in Q1, on the back of new orders.

The official PMI was 51.7, up from 51.2 in May. Production rose one percentage point from May, and external demand increased, boosting the manufacturing sector. Construction has sector continued to perform strongly, as the government takes to capacity building to try and enhance productivity and boost employment. Crude oil, chemicals, and non-metal minerals were all such sectors that continued to contract during this period.

Experts at TechSci Research have justifiably called this a mixed bag. Dampened global demand and an overleveraged economy means that the Chinese economy is slowing down, and has been for the past 2-3 years. Huge amount of debt, both corporate and government, means that many Chinese companies are finding it difficult to get loans and open lines of credit. This is a problem which is seen more often in SMEs than in the larger companies, which explains the behaviour of the Caixin PMI.

Relatively higher wages add to the mix as countries with poor infrastructure but cheap labour (such as India, Thailand, Myanmar etc.) are slowly pumping more into developing infrastructure; all things equal, investors and manufacturers would prefer to spend less, and are in a position where they are actively courted by different governments (initiatives such as ‘Make in India’ come to mind). Such circumstances will prove to be a tough challenge for the Chinese economy as it struggles to consolidate itself.

However, it must be remembered that while growth may not touch double digits, as China was half a decade back, keeping in mind the current data and the fact that Beijing is expected to grow at 6.5%, it seems that the notion of a Chinese ‘hard landing’ is rather doubtful.

 

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