While the June numbers for factory activity of China were encouraging and was better than expected, fueling hopes for a fast economic recovery globally and domestically. However, the Chinese economy will however be dragged for some time because of the persistent weakness in export orders because of the novel coronavirus pandemic in the export markets of the country.
Data from National Bureau of Statistics (NBS) of China showed that the official manufacturing Purchasing Manager’s Index (PMI) for the country was at 50.9 in June, compared with a value of 50.6 in May. Analysts had expected the number to come in at 50.4. The 50-point mark separates expansion from contraction on a monthly basis.
The quickening pace of expansion in production was the driver for the growth. There was also improvement in the forward-looking total new orders gauge which rose to touch 51.4 from 50.9 in May which indicated a pickup in domestic demand with improvements being recorded for industries from non-ferrous metals to general equipment and electrical machinery.
But there was continued contraction in export orders, albeit at a slower pace, with a sub-index standing at 42.6 compared to 35.3 in May, well below the 50-point mark.
“Despite the strong recovery between March and mid-June, we believe a full economic recovery remains distant. In our view, it is too early for Beijing to reverse its easing stance,” Nomura analysts wrote in a note to clients.
The prevailing uncertainty about the outlook was underscored by NBS official Zhao Qinghe in a statement. He noted that compared to larger companies, the smaller firms were suffering more in China. There was evidence of contraction in activity in these firms last month in the PMI data which was despite a string of government measures to support smaller companies.
It expects to record a net loss of up to 40 million yuan in the first half of 2020, compared to a net profit of 114.7 million yuan in year-ago period, said Shanghai prime machinery, a Chinese manufacturer of fasteners that has been forced to close a factory in Germany this year due to the pandemic.
A flurry of better-than-expected indicators recently was noticed in high frequency Chinese data tracked by Nomura, which included power production, property and auto sales. Te data also indicated an anticipation of boost in the economic activity for the rest of this year because of higher spending – particularly in infrastructure.
There was growth in China’s services sector activity as showed by a separate official survey for the month of June. The non-manufacturing Purchasing Managers’ Index rose to 54.4, from 53.6 in May, suggesting steadily stabilising business confidence.
But with Covid-19 infections steadily rising across the world, export demand has remained weak on the overall despite a slight improvement in exports of China for the current month as restrictions across countries were eased.
There was however a reduction in headcount in factories despite stronger demand which was the second time that had happened since factories reopened in China.
“The contrast between rising new orders and more job-shedding shows companies were still cautious about demand recovering in the short term,” Huatai securities macro analyst Yang Chang said
(Adapted from TheHinduBusinessLine.com)