China : Aug official PMI likely to show steadying but at weak levels

BEIJING : Activity in China’s manufacturing sector likely shrank for a second straight month in August but at a marginal pace, a Reuters poll showed, suggesting the economy is steadying even as the government vows to cut more industrial overcapacity.The official manufacturing Purchasing Managers’ Index (PMI) is expected to hold at 49.9 in August, unchanged from July, according to the median forecast of 35 analysts polled by Reuters.

That would be only fractionally below the neutral 50.0 mark separating expansion in activity from contraction on a monthly basis, suggesting conditions may be stabilising after a long slowdown but also offering few signs of a pick-up any time soon.

Profits earned by China’s industrial firms grew the fastest in four months in July, aided by improving sales and reduced costs, data showed on Saturday, with government projects possibly helping to ease financial strains for some companies.

But the gains may be due largely to rebounding prices for commodities such as steel. A government spokesperson said an obvious improvement in demand is still not in sight.

Factory activity in China recovered slightly in the first quarter, but has been on a mild downward trend since.

While second-quarter economic growth was a bit stronger than expected, thanks to government infrastructure spending and a housing boom, economists point to numerous risks ahead.

Beijing has pledged to quicken the pace of its industrial capacity cuts in coming months after falling behind earlier in the year, raising the risk of more layoffs and debt defaults which could further strain the banking system.

Slowing property investment, meanwhile, is adding to fears that a near one-year housing boom may be peaking, threatening one of the economy’s recent growth drivers. And more cities are imposing cooling measures to curb sharply rising prices.

Private investment growth has also shrunk to record lows, pointing to risks of renewed weakness ahead.

To be sure, China’s central bank has plenty of room to cut interest rates further. But sources say evidence of companies hoarding cash has reinforced policymakers’ view that there is no major benefit in easing policy again as long as conditions do not sharply deteriorate.

Forcing more money in the system could boost already high debt levels and increase speculative activities, with policymakers already clearly worried about possible bubbles in the property and bond markets.

Debt has also emerged as one of China’s biggest challenges, with the total load rising to 250 percent of gross domestic product (GDP) last year.

China is looking to allow industrial firms to convert their debt into equity stakes as early as next month, state media reported on Monday. But that could merely saddle banks with more questionable assets.

The official manufacturing PMI data will be released on Sept. 1, along with the official non-manufacturing PMI.

Services continued to expand robustly in July, as a result of strong performance in the transportation, telecommunication, construction and tourism sectors.

The Markit/Caixin PMI, a private gauge of manufacturing activity which focuses more on small and mid-sized firms, also is due on Sept. 1. Analysts expect it to fall to 50.1, compared with the previous month’s reading of 50.6.

In July, the official and Caixin factory reading showed a marked divergence. Caixin showed the highest manufacturing growth since February 2015, while the government showed manufacturing starting to slump.