China December factory activity expands more slowly but confidence jumps: Survey

Asia Business World

BEIJING: China’s factory activity expanded at a slower clip in December, pulling back from a three-year high the previous month as new orders softened, a private survey showed on Thursday (Jan 2).

But production continued to grow at a solid pace and business confidence shot up amid thawing trade tensions with the United States, offering some support for the cooling economy. Beijing and Washington agreed last month on an initial deal that will de-escalate their prolonged trade war.

The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) for December eased to 51.5 from 51.8 the previous month missing analysts’ expectations that the reading would hold steady . But it remained above the 50-mark that separates expansion from contraction for the fifth straight month.

The findings, which focus mostly on small and export-oriented businesses, were less optimistic than those in an official survey released on Tuesday, which showed activity expanded as production grew at the fastest pace in over a year and easing trade tensions revived export orders.

But one analyst said the improvement in business confidence and willingness to increase production and inventories were positive changes.

“Subdued business confidence was a major factor behind the economic slowdown this year,” said Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group.

“As the phase one trade deal between China and the US has sent out positive signals, there is room for a recovery in business confidence, which should be able to help stabilize the economy.”

READ: US-China ‘phase one’ trade deal to be signed on Jan 15

Adding to the more optimistic tone, the Caixin survey also showed firms were able to increase their selling prices for the first time in six months, signalling improving profitability.

Growth in China’s industrial and retail sectors beat expectations in November, as government stimulus measures boosted demand.

But the ailing manufacturing sector is not out of the woods yet, and analysts are unsure whether recent signs of improvement will be sustainable.

Demand remained wobbly in December, with total new orders growing more slowly and export orders expanding only marginally, the Caixin survey showed.

“The recovery in the manufacturing sector is still nascent,” said Nie Wen, economist at Hwabao Trust in Shanghai, predicting the central bank will likely continue to ease policy until the economy is convincingly on more solid footing.

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As expected, the People’s Bank of China moved quickly in 2020 to offer further support, announcing on New Year’s Day that it was cutting the amount of cash that all banks must hold as reserves. The move will release around 800 billion yuan (US$114.91 billion) in funds to shore up the slowing economy.

The PBOC has now cut banks’ reserve requirement ratio (RRR) eight times since early 2018, and in recent months has made modest cuts in some of its key lending rates.

But officials have repeatedly pledged not to resort to “flood-like” stimulus like that in past economic downturns, which left a mountain of debt and stoked fears of property market bubbles.

Beijing plans to set a lower economic growth target of around 6 per cent in 2020, relying on increased state infrastructure spending to ward off a sharper slowdown, policy sources said.

Still, some analysts believe growth could cool to 5.7 per cent in 2020 even with additional support measures. Third-quarter growth of 6 per cent was the weakest in nearly 30 years. 

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