China's manufacturing sector expands in November

Beijing

CHINA'S vast manufacturing sector unexpectedly picked up in November from the previous month, the findings of two surveys showed, as recent government infrastructure spending spilled over to the real economy.

However, analysts warn that the world's second-largest economy has not yet stabilised and will continue to face challenges next year as the trade war with the US continues to disrupt global supply chains.

The official Purchasing Managers' Index expanded in November for the first time in seven months to 50.2, on the back of stronger new domestic orders.

A private manufacturing survey published by Caixin and IHS also expanded in November, coming in at 51.8, which is stable compared with October.

PMI readings above 50 indicate expansion, while those below that level signal contraction. The official survey collects data from large state-owned enterprises whereas the Caixin version focusses on smaller private companies.

"The synchronised improvement in the survey data does point towards some uptick in growth last month," said Julian Evans-Pritchard, senior China economist at Capital Economics.

China is set to grow at its slowest rate in 30 years this year, with the economy hit by ongoing trade tensions with the US and internal reform.

The Chinese government has been walking a fine line between stimulating the economy all the while pressuring banks to deleverage and clean up their balance sheets.

It has targeted support to specific sectors of the economy such as small companies and front-loading large infrastructure projects.

On a breakdown basis, the PMIs last month showed that total new orders in the official index bounced back to expansionary territory with the sub-index rising to 51.3. This is the highest level since April, a sign that domestic demand is picking up.

"The data has surprised us by coming earlier than our expectations. One of the major pushes of new orders is that infrastructure investment has moved from the investment stage to the production stage. This will continue to give support to new orders in the coming year," said ING economist Irene Pang.

"This view is also supported by the rise in prices of steel and cement, which are used in infrastructure projects."

Employment rose as well in the Caixin PMI, as did output and new business.

However, analysts say it is still too soon to say whether the economy has bottomed out, adding that effects from the trade war will continue to impact the economy well into next year.

China and the US have yet to sign a Phase One deal, which is expected to lay the foundations for a more substantive agreement. Deflationary pressures are also forcing companies to stockpile.

In the official PMI, other important indices such as new export orders continued to shrink to 47.0, a sign that China's export sector is struggling with side effects of the trade war.

"We don't think Beijing will overreact to the PMI readings, as it has already learned the lessons from spring this year when some headline data pointed to a recovery," Lu Ting, chief China economist at Nomura, wrote in a note.

"Amid a deteriorating growth outlook, Beijing will likely to roll out more easing measures despite a limited policy room."

Last week, China's central bank and other regulators urged the country's thousands of small troubled banks to increase capital, cut bad loans, limit dividends and replace management.

Beijing also floated a sweeping package of measures that would encourage mergers among smaller institutions and enlist local governments to support them. There have been worrying signs some of China's smaller lenders are struggling to have access to liquidity.

China stocks ended higher on Monday after the better-than-expected reports, but the gains were tempered by uncertainties surrounding the fate of the planned US-China trade deal.

The blue-chip CSI300 index rose 0.2 per cent to 3,836.06, while the Shanghai Composite Index added 0.1 per cent to 2,875.81. After Monday's data was released, both ING and ANZ left their full-year GDP forecasts for 2019 unchanged at 6.2 per cent.

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