China Factory Momentum Remains Intact Amid Smog and Debt Curbs

(Bloomberg) -- China's official factory gauge maintained momentum, signaling campaigns to reduce both pollution and debt risk haven't curbed output.

Key Points

• The manufacturing purchasing managers index edged down to 51.6 in December, in line with the forecast in Bloomberg's survey of economists, from 51.8 the prior month
• The non-manufacturing PMI stood at 55, compared with a projected 54.7 reading and 54.8 in November, the National Bureau of Statistics said Sunday
• Numbers above 50 indicate improving conditions while those below signal deterioration

Big Picture

Steadiness in manufacturing comes even amid intensifying efforts to curb smog and a push to reduce excessive borrowing. Top leaders have been signaling less emphasis on pursuing expansion at all costs and this month, at their main economic planning conclave for 2018, they pledged to focus on “critical battles” against financial risk, pollution and poverty.

Economist Takeaways

“The relatively healthy PMI number shows the government can still tolerate the impact of deleveraging,” said Ding Shuang, chief China economist at Standard Chartered Plc in Hong Kong. “The PMI decline reflects the impact of financial deleveraging and property curbs on the economy. Deleveraging has pushed up interest rates and slowed credit growth.”

“Growth momentum still seems to be steady, and thereby monetary policy will continue to stay on put,” said Larry Hu, chief China economist at Macquarie Securities Ltd. in Hong Kong. “We see the risk in 2018 biasing toward the downside, especially from the infrastructure spending side, due to the government's push on deleveraging.”

“The drop in PMI is probably due to the credit tightening toward the end of the year,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “The trend of economic slowdown may become more and more obvious, but the economy's quality may be improved.”

“The moderate decline in headline PMI was mainly attributable to the lower inventory, while production growth remained solid,” Liu Wenqi, an analyst at China International Capital Corp. in Beijing, wrote in a report. “Manufacturing PMI indicated continued strength in the cyclical recovery. Looking forward, there may be more room for restocking demand if the economic growth came in higher than the market expected at the beginning of 2018.”

The trend of economic stability will be extended, the NBS said in a statement, adding that market demand recovered and industrial restructuring accelerated, leading to shortage of energy and raw materials.

The PMI surveys show companies are confident about economic development, the China Federation of Logistics and Purchasing said in a statement Sunday. The agency, which jointly releases PMI with the NBS, said it projects 2018 economic growth of about 6.5 percent.

Bloomberg Economics

“A lower reading but still slightly above the 50-mark points to a factory sector still expanding but at a slightly slower pace,” Tom Orlik, a Bloomberg economist in Beijing, wrote in a report. “Growth remains remarkably robust, underpinned by resurgent global demand, stimulus-boosted infrastructure spending, and a deleveraging program that remains more honored in the breach than the observance.”

Increases in PMI gauges for input and output prices suggest China's industrial reflation story will stay strong into 2018, and initial PMI readings for China's major export markets point to continued strong demand, he said.

The Details

• New manufacturing export orders climbed to a six-month high of 51.9 from 50.8
• Input prices increased to 62.2 from 59.8
• Order backlogs slipped to 46.3 from 46.6
• The non-manufacturing gauge of construction activity climbed to 63.9 from 61.4

To contact Bloomberg News staff for this story: Judy Chen in Shanghai at xchen45@bloomberg.net.

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Jeff Kearns, John McCluskey

©2017 Bloomberg L.P.

With assistance from Judy Chen