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China Factory Gauge Signals Economic Output Resilient in August

China’s official factory gauge further strengthened, suggesting the economy’s resilience may offer policy makers more room to continue their push to curb financial risks in the second half of the year.

Key Points

  • The manufacturing purchasing managers index increased to 51.7 in August, compared with the 51.3 forecast in a Bloomberg survey of economists, and the 51.4 reading in July
  • The non-manufacturing PMI slipped to 53.4 compared to 54.5 in July
  • Numbers higher than 50 indicate improving conditions; readings below 50 signal a worsening outlook

Big Picture

The world’s second-largest economy showed an across-the-board cooling in July after performing more strongly than analysts had anticipated in the first half, buoyed by a turnaround for exports and strong domestic demand. The challenge ahead for policy makers is to balance preserving the pace of growth with slowing the pace of credit expansion.

Economist Takeaways

“Growth has been stronger than expected,” Donna Kwok, a senior China economist at UBS Group AG in Hong Kong, wrote in a recent note. “So far this year industrial production, property investment, retail sales and exports are all growing at a faster pace than in 2016.”

“The manufacturing sector is more resilient than many people think. Electronics supply chains remain supportive while the domestic investment pipeline is still strong,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. in Hong Kong. “We are seeing some upside risk to our 2017 GDP forecast of 6.7 percent.”

“China’s supply-side reform and capacity reduction have been very successful,” said Yao Shaohua, an economist at ABCI Securities Co. in Hong Kong. “Profits at raw material corporates surged on strong prices, which in turn supported factories’ output and investment.”

The Details

  • New orders climbed to 53.1 from 52.8 in July
  • Business activity expectations rose to 59.5 from 59.1
  • Conditions at large, medium and smaller enterprises diverged; the larger firms index slipped to 52.8 from 52.9, the medium firms index rose to 51.0 from 49.6 and the smaller companies index rose to 49.1 from 48.9
  • Inventory indexes in both manufacturing and non-manufacturing sectors fell

— With assistance by Kevin Hamlin, Xiaoqing Pi, Fion Li, and Yinan Zhao

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