China’s factory activity unexpectedly picks up in August, but too early to tell if recovery will last

China’s factory activity surprisingly returned to expansion in August, a private-sector survey showed on Friday, with supply, domestic demand and employment improving, suggesting official efforts to revive growth might be having some effect.

The Caixin/S&P Global manufacturing purchasing managers’ index (PMI) rose to 51.0 in August from 49.2 in July, beating analysts’ forecasts of 49.3 and marking the highest reading since February. The 50-point index mark separates growth from contraction.

The data, a snapshot of the sprawling manufacturing economy, surprised to the upside but offered a mixed picture of the sector, a day after an official survey showed manufacturing activity contracted for a fifth straight month.

The Caixin manufacturing PMI surveys around 650 private and state-owned manufacturers and focuses more on export-oriented firms in coastal regions, while the official PMI surveys 3,200 companies across China.

Analysts said it is too early to tell if the world’s second-largest economy has recovered meaningfully as a worsening property downturn and weakness in household consumption prompt expectations of more stimulus.

Manufacturers reported increases in both output and total order intakes thanks to firmer market demand, the Caixin survey showed.

The upturn in sales contrasts with deepening declines in new export orders, suggesting stronger domestic demand was the main source of growth.

Planned company expansions, meanwhile, supported a rise in employment in the sector, leading to the fastest rate of job creation since March 2010.

Backlogs of work rose marginally for the third straight month. Temporary factory closures due to high temperatures and floods reportedly pushed up unfinished workloads.

The problem of insufficient internal demand and weak expectations may form a vicious cycle for a longer period of time

Wang Zhe

“The slight rise in prices buffered the pressure of deflation, logistics remained smooth, inventory of raw materials fell, and manufacturers held on to their optimism, although to a limited extent,” said Wang Zhe, an economist at Caixin Insight Group.

Positive sentiment hit an 11-month low.

“Looking ahead, seasonal impacts will gradually subside, but the problem of insufficient internal demand and weak expectations may form a vicious cycle for a longer period of time,” Wang added.

As authorities ramp up support for the sputtering economy, two of China’s biggest cities eased mortgage curbs on Wednesday and the finance ministry extended tax preferential policies for homebuyers, foreign workers and small firms.

China’s central bank and financial regulator on Thursday also issued notices to ease some borrowing rules to aid homebuyers, including lowering the existing mortgage rate for first-home buyers and the down payment ratio in some cities.

South China Morning Post