China Manufacturing Momentum Intact Amid Property Slump

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China's manufacturing sector continued to expand in December, providing some relief to Beijing as the world's second-largest economy continues to struggle with the ongoing property market slump.

The official manufacturing purchasing managers' index rose to 50.3, above the 50-level that separates expansion from contraction in conditions, the National Bureau of Statistics said Friday. The non-manufacturing gauge, which measures activity in the construction and services sectors, increased to 52.7, above the consensus forecast.

China's economy is facing rising pressure on multiple fronts, with policy makers announcing a shift in focus to stabilizing growth next year with “proactive” policies. However, the housing market is still struggling, local government finances are being hit by weak land sales and there has been a series of recent Covid-19 outbreaks, including one which caused authorities to lockdown the city of Xi'an.

“Today's PMI showed temporary stabilization in between two waves of domestic Covid outbreaks,” said Liu Peiqian, China economist at NatWest Group Plc. “We see more downside pressures for short-term growth, as ongoing Covid spread coupled with the ‘zero-Covid' strategy will likely lead to more disruptions to economic activities ahead of Chinese New Year in late January.”

However, “easing prices pressures will likely give policy makers more room for easing policies to be implemented,” she said.

Slowing Inflation

The manufacturing PMI climbed for a second straight month as some commodities prices fell significantly and cost pressures on companies eased to some extent, said Zhao Qinghe, senior statistician at the NBS, who argued that the data showed China's economy has maintained its recovery trend.

“The rebound was driven by the restocking effort of major factories, thanks to falling input prices,” said Xing Zhaopeng, senior strategist at Australia & New Zealand Banking Group Ltd.

However, insufficient demand remains a main problem for manufacturers. More than 39% of the surveyed companies said they face such issues, indicating “the problem of shrinking demand is still prominent,” Zhang Liqun, a researcher with the State Council's Development Research Center, said in a statement released by the China Federation of Logistics and Purchasing.

New orders remained subdued and new export orders worsened, highlighting the pressure China faces to stabilize trade next year. Construction activity cooled, with the sub-index falling to 56.3 due to cold weather and the approach of holidays, the NBS's Zhao said.

What Bloomberg's Economists Says...
The data “show the industrial sector continued its low-gear recovery, while the services sector picked up. Despite the positive headline readings, the moderation in production sub-index and construction PMI suggests more government efforts are needed to ease the energy shortage and accelerate infrastructure spending.”
-- Eric Zhu
See here for full note here

The property downturn continues to dampen sentiment and slow down construction activities, and government pressure on local governments to borrow and spend isn't yet having much effect in boosting investment and construction.

A set of earliest available indicators tracked by Bloomberg suggested that while the economy remained stable overall, the slumping property sector and slowing external demand are clouding the outlook.

Other key highlights from the PMI data:

Sub-index for manufacturing jobs rose to 49.1; non-manufacturing employment increased to 47.6
Price pressures on manufacturers eased in the month with input and output prices falling
The sub-indexes tracking large and medium manufacturers picked up, while the sub-index for small enterprises fell

With assistance from Bloomberg