China’s Manufacturing Holds Firm With Price Pressures Easing

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China's manufacturing output continued to expand in June, a key survey showed, with signs that price pressures are easing as the government clamps down on surging raw material costs.

The official manufacturing purchasing managers' index was little changed at 50.9 in June from 51 in May, the National Bureau of Statistics said Wednesday. That was largely in line with the 50.8 projected by economists and above the 50-mark that signals expansion.

The non-manufacturing gauge, which measures activity in the construction and services sectors, came in worse than expected at 53.5. The lower reading was largely due to recent virus outbreaks in some parts of the country, which reduced consumer activity.

“Manufacturing sector growth may remain stable into the second half, supported by strong external demand while the service sector recovers gradually,” said Peiqian Liu, an economist at Natwest Group Plc. “China will need to accelerate its vaccination progress in order to reopen the economy further.”

The recovery has steadied in recent months after rapid expansion from the pandemic, with growth becoming more balanced among sectors. The PMI figures add to expectations that growth will gradually ease for the rest of the year though remain at a solid pace, suggesting no need for the central bank to shift its policy stance.

The People's Bank of China this week provided a positive assessment of the economy, saying it's showing more stability and strength even though global and domestic risks remain. An index of eight early indicators tracked by Bloomberg also showed steady growth in June.

What Bloomberg Economics Says...
The readings point to robust 2Q GDP data due in mid-July. But the gap between production and consumption is likely to have stayed wide.
Chang Shu, chief Asia economist
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Supply chain problems are weighing on manufacturing, with recent computer chip, coal and power supply shortages hitting output in some industries, the NBS said. The production sub-index and new order sub-index for vehicle manufacturing contracted for two straight months, a reflection of the negative impact the chip shortage is having on the sector.

A bright spot in the survey was the easing in price pressures, with both input and output prices of manufacturers falling significantly, suggesting the government's measures to increase supply of some commodities and steady prices are starting to work.

Manufacturing demand remained strong with the new orders sub-index rising to 51.5. However, new export orders contracted for a second month, possibly due to congestion at Yantian port after local virus cases in southern China disrupted operations.

Regional outbreaks also hurt the services industry, with indexes tracking air transport, hotels and catering sectors contracting in the month, signaling a decrease in activity, the NBS said.

Employment remained in contraction, with the sub-index for manufacturing jobs rising slightly to 49.2 in June but worsening to 48 for non-manufacturing.

“Without a pickup of service employment, the authorities will not think about a broad-based tightening,” said Raymond Yeung, chief economist of Greater China at Australia & New Zealand Banking Group Ltd. “The PBOC will likely keep a relevant neutral stance in the money market.”

With assistance from Bloomberg