World Economy

Signs Show China Economy Stabilizing

Signs Show China Economy StabilizingSigns Show China Economy Stabilizing

A private gauge of Chinese manufacturing showed signs the industry is stabilizing after policy makers eased monetary settings and bolstered provincial finances.

The preliminary Purchasing Managers’ Index from HSBC and Markit Economics was at 49.6 for June, beating the median estimate of 49.4 in a Bloomberg survey and up from 49.2 last month. Numbers below 50 indicate contraction.

Tuesday’s release–the first reading of the world’s second-biggest economy’s health in June–follows official data showing stabilization in industrial production, credit growth and property sales in May. Further evidence of a pick-up could diminish the scale of any additional monetary easing by the People’s Bank of China.

“We can see signs of stabilization because local governments’ infrastructure construction saw a big pickup in June,” said Shen Jianguang, chief Asia economist at Mizuho Securities in Hong Kong. “Fiscal policy used to be the bottleneck. Now it has really become proactive.”

The Shanghai Composite Index swung between gains and losses and was 2.4% lower on Tuesday.

Increases in new orders, the backlog of work and purchases contributed to the rebound, according to the statement.

 Cutting Jobs

“On the other hand, manufacturers continued to cut their staff numbers, with the latest reduction the sharpest in over six years,” Annabel Fiddes, economist at Markit, said in a statement released with the data. “This suggests that companies have relatively muted growth expectations as demand conditions both at home and abroad remain relatively subdued.”

China’s central bank has pumped liquidity to boost the economy by cutting interest rates three times and reducing banks’ reserve requirement ratios twice since November. It has also used alternative lending facilities to direct money into sectors it seeks to support.

Yang Zhao, Hong Kong-based chief China economist at Nomura, said headwinds remain strong, maintaining a call for two more 50 basis point cuts to the banks’ RRRs and two more quarter percentage point interest-rate cuts this year.

A separate China Beige Book survey, published by New York-based CBB International, found that companies are doing better than the official data shows and deflation risks may have peaked. The economy is rebalancing as central and southwest regions outperform, the report said.

“The policy outlook is becoming more complex,” Bloomberg economists Tom Orlik and Fielding Chen wrote in a note after the release. “Signs of stabilizing growth and reports of renewed capital inflows argue for a remission in easing. Higher interbank rates and a slumping equity market make the case for more aggressive support.”