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China's manufacturing sector remains strong in May

Official PMI rises to 51.9 last month from 51.4 in April, growing at the fastest pace in eight months

Operating conditions across China's manufacturing sector have remained stable while the growth in the price of industrial products has gained momentum, analysts say.


CHINA'S manufacturing sector performed well in May, growing faster than analysts' expectations despite concerns about mounting debt, a crackdown on the property sector, and persistent trade tensions with the US.

The official Purchasing Managers' Index (PMI) released on Thursday rose to 51.9 in May, from 51.4 in April, growing at the fastest pace in eight months.

The private version of the index, published by Caixin and IHS Markit, came in at 51.1 - unchanged from April.

Both sets of data came in well above the 50-point mark that that separates growth from contraction.

China's official PMI gauge focuses on large companies and state-owned enterprises, while the reading by Caixin and IHS Markit focuses on small and medium enterprises.

"Overall, operating conditions across the manufacturing sector remained stable. The growth in the price of industrial products has gained momentum," said Zhong Zhengsheng, director of macro-economic analysis at CEBM Group, a subsidiary of Caixin.

Economists had expected growth of the manufacturing sector to slow as measures to reign in the property sector, deleverage corporate debt and clean up the financial sector trickled to the real economy.

But China's economy has proved particularly resilient so far, rebounding strongly since March and the end of the winter ban on coal and on curbs on steel production.

A recent report published by Greenpeace showed that carbon emissions are on track to rise to their fastest pace in more than seven years this year with consumption of coal, oil and gas all growing steadily to support stronger investment growth.

On a breakdown basis, export orders, production and new orders improved month on month in the official PMI, and this comes despite trade tensions with the US.

In the Caixin index, the sub-index for production growth accelerated slightly, as did those for new orders and export orders.

Analysts said that the manufacturing sector should slow in the next months. President Xi Jinping has made curbing pollution one of his main policy goals, which could lead to the implementation of more stringent anti-pollution measures to come.

Industry watchers added that ongoing curbs on the real estate market will also hamper the manufacturing sector.

Impeding trade restrictions on the imports of Chinese goods worth US$50 billion as well as investment restrictions on Chinese acquisitions of US technology could hurt the export sector.

"We doubt this strength will be sustained for long, given that it appears to mostly reflect a temporary boost to industrial output from the easing of pollution controls rather than a turnaround in underlying demand," said Julian Evans-Prit-chard, a senior China economist at Capital Economics.

"The growth of end-demand, such as infrastructure and property investment, has slumped in recent months due at least in part to the government's deleveraging efforts," said Nomura analysts in a note, adding that they expect slower PMI growth in the next months.

In the official survey, manufacturers said that they were concerned about tightening in funding over recent months. Some 40.1 per cent of all firms polled raised the issue in May, according to Zhao Qinghe, an official with the statistics bureau. "Big cost pressure is still one of the major problems facing Chinese manufacturers these days," he added.

Earlier this week, the World Bank said that China's main challenge was to not raise the growth rate of investment, but to ensure that it goes to sectors and firms that are more productive. "The main risks to the outlook are high corporate indebtedness and rising trade tensions," it said.

The bank expects gross domestic product growth to moderate to 6.5 per cent in 2018 and an average of 6.3 per cent in the following two years.

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