China’s December factory activity set to expand for a second month - GulfToday

China’s December factory activity may expand in 2nd month as well


Employees work on a drilling machine production line at a factory in Zhangjiakou, China. Reuters

China’s factory activity likely expanded again in December on stronger external demand and an infrastructure push at home, but the pace of growth is set to ease as markets await more certainty on a U.S.-China trade truce, a Reuters poll showed.

The official Purchasing Managers’ Index (PMI) for December is expected to come in at 50.1, slightly above the 50-point mark that separates expansion from contraction on a monthly basis, according to the median forecasts of 27 economists.

This would be notch below November’s 50.2, which unexpectedly ended six straight months of contraction as Beijing’s accelerated stimulus measures buoyed domestic demand.

The recovery has been supported by a rebound in external demand, a pick-up in infrastructure investment, a still-resilient property market, and a moderate inventory restocking cycle propelled by improved growth expectations, analysts at China International Capital Corp (CIIC) said in a note.

The United States and China cooled their trade war earlier this month, announcing a “Phase one” agreement that reduces some US tariffs in exchange for what US officials said would be a big jump in Chinese purchases of American farm products and other goods.

Zhang Deli, a macro analyst with Guangdong-based Lianxun Securities, noted that a weekly export container shipping index tracked by the Shanghai Shipping Exchange - the China Containerized Freight Index - rebounded sharply in December, pointing to improved export demand.

But it remains unclear when and where the formal signing of a trade deal will take place, and no “Phase two” deal, which would involve tougher topics such as forced technology transfers to US firms, is in sight.

Growth in China’s industrial and retail sectors both beat expectations in November.

A private business survey - the Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) - which analysts say focuses more on small- and medium-sized, export-driven Chinese firms - is also expected to show factory activity expanded in December.

But it is also forecast to show slightly more subdued growth than the previous month at 51.7, down from 51.8 in November.

The economy could face bigger downward pressure next year, Premier Li Keqiang said this month, underlining Beijing’s challenge to stabilise growth and support employment. A separate Reuters poll showed China’s GDP growth is expected at 6.2 per cent in 2019, slowing to 5.9 per cent in 2020.

After lowering its lending benchmark rate in November, China kept it unchanged in December, but markets widely expect further monetary easing in 2020.

On Saturday, the central bank said it would use the loan prime rate (LPR) as a new benchmark for pricing existing floating-rate loans, paving the way for more rate cuts next year.

Premier Li also stressed last week the need to lower funding costs for smaller firms, including by implementing more broad-based and targeted cuts in the amount of cash banks must deposit as reserves. The annual Central Economic Work Conference, a closed-door gathering of top leaders and policymakers, concluded this month that China will keep economic policies stable but make them more effective in 2020.

Beijing plans to set a lower economic growth target of around 6 per cent in 2020 from this year’s 6 per cent-6.5 per cent, relying on increased state infrastructure spending to ward off a sharper slowdown, policy sources told Reuters. The official PMI and its sister survey on the services sector will be released on Tuesday.

The Caixin manufacturing PMI will be published on Jan. 2 and the Caixin services PMI survey will be out on Jan.6.

Profits at China’s industrial firms grew at the fastest pace in eight months in November, but broad weakness in domestic demand remains a risk for company earnings next year.

China’s industrial sector has faced persistent pressure in the past year, with manufacturers battling sluggish demand and a profit-denting trade dispute with the United States. But recent factory activity surveys have pointed to a nascent recovery in the manufacturing sector, following Beijing’s accelerated stimulus measures to steady growth.

Industrial profits in November rose 5.4 per cent from a year earlier to 593.9 billion yuan ($84.93 billion), snapping three months of decline, as production and sales quickened, data from the National Bureau of Statistics (NBS) showed on Friday. That compared with a 9.9 per cent drop in October. For January-November, industrial firms notched profits of 5.61 trillion yuan, down 2.1 per cent from a year earlier, but slightly better than a 2.9 per cent fall in the first 10 months.


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