With the growth of costs for raw materials increasing at the fastest pace in more than two decades factory activity growth in China slowed down slightly in May. The high costs of raw materials affected the output of small and export-oriented firms.
Data from the National Bureau of Statistics (NBS) showed on Monday that in May, the official manufacturing Purchasing Managers’ Index (PMI) moved down lower to lower to 51.0 whereas analysts had expected that it would remain unchanged at 51.1 which was clocked in April.
The value of the official PMI, which primarily comprises of data from big and state-owned firms, has remained over the 50-point market for more than year mark. This point technically separates growth from contraction for the period of time under consideration.
High raw material costs, the pandemic situation overseas and other problems has not set the economic recovery of the Chinese economy from the Covid-19 hit on sound foundations even though the economy has largely managed to ward off the pandemic recession and hit.
Even as economic rebounding in the United States and parts of Europe are likely to be “offset by increasing Covid-19 cases in ASEAN, which is the biggest trade partner of China”, “external demand (for Chinese goods) will likely remain flat”, noted Iris Pang, chief economist for Greater China at ING, in a note.
She added that the other challenges for the Chinese economy include the high commodity prices, the continued semiconductor chip shortages and some fresh cases of Covid-19 infections emerging from China’s Guangdong province, which is home to most electronic factories.
A sub-index for new export orders stood at 48.3 in May, down from 50.4 in the previous month and slipping sharply into contraction.
So far this year, there has been a surge in the prices for commodities such as coal, steel, iron ore and copper because of recoveries in demand in a post-lockdown situation as well as the easing of liquidity globally.
In recent weeks, concern about rising commodity prices have been repeatedly expressed by China’s policymakers who have also called for stricter management of supply and demand for stricter regulation of “malicious speculation.”
“We expect commodity prices to stabilize in the coming months,” said Louis Kuijs, head of Asia economics at Oxford Economics. He said that the cost pressures on China’s firms could get reduced because of an increase in global commodity supply during the second half of the current year as well as stricter regulation of the spot and futures markets.
High shipping costs and an appreciating Chinese currency are also challenges that are faced by Chinese factories in addition to a surge in raw material prices. While some of the smaller companies have stopped taking orders to avoid losses, there are some companies that are able to pass on the higher costs to overseas customers.
“The mixed data strengthens our case for policy stability in the near term, especially before the CCP’s centenary celebration in July,” said analysts at Citi in a note, referring to the ruling Communist Party.
(Adapted from Investing.com)