China's factories, services cap year of gains as prices rise

[BEIJING] China's factories and services both closed out 2016 on relatively robust notes that signal growth is strong enough for policy makers to keep pushing for economic reforms in 2017.

The manufacturing purchasing managers index stabilised near a post-2012 high in December, edging down to 51.4 from 51.7 the prior month. The non-manufacturing PMI slipped to 54.5 from a two-year high of 54.7 in November. Numbers higher than 50 indicate improving conditions. A gauge of factory input prices surged to a five-year high of 69.6.

"Clearly activity levels firmed heading into year-end," said Geoffrey Yu, head of the UK investment office at UBS Wealth Management in London.

"Stabilisation isn't too much of an issue right now, compared to the micro-level problems such as liquidity, regulation, and of course the exchange rate."

The readings capped a year of strengthening across a range of indicators and continued a reversal from the dark outlook in February, when the manufacturing gauge tumbled to 49. The economy is on pace to meet the official growth target, posting 6.7 per cent expansions in the first three quarters of 2016, while factory prices have snapped four years of deflation.

The private manufacturing PMI by Caixin Media and Markit Economics confirmed the strength in official data. The gauge advanced to 51.9 in December, the highest since January 2013, data showed Tuesday, exceeding the 50.9 estimate in a Bloomberg survey of economists.

That's good news for policy makers as they shift to neutral monetary policy and seek to defend against a trio of threats: a potential pickup in capital outflows after the yuan posted its steepest annual slump in more than two decades, Federal Reserve interest rate rises, and US President-elect Donald Trump, who has called for punitive tariffs on China's exports.

Outflow pressure may resume after a Jan 1 reset of the country's US$50,000 cap on how much foreign currency individuals are allowed to convert each year. An estimated US$689 billion flowed out of China in the first 10 months of 2016, a Bloomberg Intelligence gauge shows.

China's foreign reserves, the world's largest stockpile, fell to a five-year low of US$3.05 trillion as of November. Data scheduled for release on Jan 7 will show the hoard fell to US$3.01 trillion, according to the median estimate of economists surveyed by Bloomberg. Authorities plan to step up monitoring of how citizens use their annual quota for buying foreign currencies, according to four people familiar with the matter.

China's central bank said Friday it tightened requirements for lenders to report cross-border transactions by customers as part of stepped-up efforts to curb money laundering.

Ma Jun, chief economist of the People's Bank of China research bureau, said the requirement "is not capital control at all", the official Xinhua News Agency reported Sunday. The policy stoked concern the government is trying to impose capital controls in a disguised form, Xinhua reported.

Outflows aside, the economy proved bears wrong last year. Growth picked up to about 7 per cent in November, a monthly tracker from Bloomberg Intelligence shows. Economists have been raising their estimates for 2016 and 2017 growth, Bloomberg surveys show.

The manufacturing report showed improving market demand and robust consumption before the new year, the National Bureau of Statistics said Sunday in a supplementary statement.

The cost of raw materials and logistics is the highest in recent years and is certain to impact business operations as rising corporate costs are squeezing profits, the NBS said "PMI indicated continued strength in the industrial cycle," China International Capital Corp economist Eva Yi wrote in a report.

"Demand growth started to firm up in sectors that cater toward manufacturing investments and personal consumption. We expect further broadening of the reflationary impulse from the upstream heavy industrial sectors to mid-to-downstream manufacturing industries."

Beyond the main PMI, other early gauges also signal the economy closed out the year on a firmer footing last month. Large and small firms reported stronger momentum and the mood among executives was the brightest in two years. Sales managers had a stable outlook.

The China Satellite Manufacturing Index was at 51 last month, close to November's five-year high of 51.4, according to San Francisco-based SpaceKnow Inc, which uses commercial satellite imagery to monitor activity across thousands of industrial sites in the country.

BLOOMBERG