China's Factory Gauge Strengthens as Producer Prices Rebound

(Bloomberg) -- China's official factory gauge firmed in February as producer prices rebounded, giving top officials gathering in Beijing a solid economic backdrop as they seek to rein in financial risk.

Key Points

• Manufacturing purchasing managers index climbed to 51.6 in February, compared with a median estimate of 51.2 in a Bloomberg survey of economists and 51.3 in January 
• Non-manufacturing PMI stood at 54.2 versus 54.6 in January
• Private manufacturing PMI from Caixin Media and Markit Economics climbed to 51.7
• Numbers higher than 50 indicate improving conditions

Big Picture

The National People's Congress starts this weekend and will likely signal increasing tolerance for slower yet sturdier economic expansion as leaders unveil their growth target for this year. Policy makers have pledged prudent monetary policy as they seek to manage the risk from swelling debt that followed earlier rounds of stimulus. They're also seeking to cut jobs in overcapacity industries to insure against a renewal of deflationary pressures.

Economist Takeaways

"Given the stability of economic activities, we believe that monetary policy will gradually tighten," Zhou Hao, an economist at Commerzbank AG in Singapore, wrote in a report. "Bubble deflating will remain the key theme in the upcoming National People's Congress."

"The recovery in global manufacturing activities and solid domestic demand has provided support," said Cui Li, head of macro research at CCB International Holdings Ltd. in Hong Kong. "The positive surprise of PMI bodes well for a continued pick up in manufacturing and improvement in earnings outlook."

"Early signs on China's economy in February point to an acceleration in growth," Tom Orlik, chief Asia economist at Bloomberg Intelligence in Beijing, wrote in a report. "Gauges of expectations show optimism at elevated levels. For now at least, managers are shrugging off the risk of trade tariffs by the U.S. or a slowdown in the domestic property sector. Factory reflation is continuing at a rapid pace."

"In the short term, growth is the key thing here," Helen Qiao, chief Greater China economist at Bank of America Corp. in Hong Kong, said in a Bloomberg Television interview. "We need to be aware of the fact that we're at the end of a policy cycle where policy makers are now seeing all of these numbers becoming more and more complacent."

"Economic activity will likely peak in the first quarter," said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong, who added that corporate profits will weaken as the producer price surge wanes this year. "The NPC will lower the growth target slightly this year, as policy makers acknowledge the nation's weaker growth potential."

The Details

• On the manufacturing PMI, readings of output, new orders and business activity expectations climbed
• Large enterprises are benefiting more from higher material prices: The PMI for large firms stood at 53.3, versus 50.5 for mid-size companies and 46.4 for small businesses
• The number of companies reporting higher labor costs rose to the highest level in about a year, according to an NBS statement released with the data
• Steel industry PMI climbed to 51.4

--With assistance from Ailing Tan Enda Curran and Kevin Hamlin

To contact Bloomberg News staff for this story: Xiaoqing Pi in Beijing at xpi1@bloomberg.net, Miao Han in Beijing at mhan22@bloomberg.net.

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Jeff Kearns

With assistance from Xiaoqing Pi, Miao Han