China factory activity gathers steam in July

China’s manufacturing activity increased last month as both production and new order rates grew rapidly, independent figures showed yesterday, but analysts warned the economy still faces headwinds from policy tightening.

The Caixin Purchasing Manager’s Index-an indicator of conditions at small manufacturerscame in at 51.1 in the month, up from 50.4 in June as it marked a four-month high in July.

A PMI figure above 50 represents growth while anything below points to contraction. Recent figures show steady expansion in the world’s second largest economy, which registered an expectation-beating 6.9 percent growth in the first half of the year, but experts warn of a slowdown as regulators look to adopt stricter financial controls aimed at reducing the country’s excessive leverage.

“Operating conditions in the manufacturing sector improved further in July, suggesting the economy’s growth momentum will be sustained,” Caixin analyst Zhengsheng Zhong said in a joint statement with data compiler IHS Markit. “That said, it’s unlikely that financial regulatory tightening will be relaxed.”

Other analysts shed doubt on whether growth could be sustained. “Stronger foreign demand helped drive a pick-up in new orders,” Julian Evans-Pritchard of Capital Economics said in a note, adding that output and price indices also rose while employment edged down.

“We don’t think this pick-up is sustainable, however, given the increasing headwinds from policy tightening and we still expect growth to slow during the second half of this year.”

The Caixin data contrasts with the government’s official purchasing managers’ index (PMI) reading Monday, which suggested factory activity expansion slowed in July. The official PMI skews more towards big firms and state-owned companies, while the Caixin index includes more private small and medium size companies and is considered by some analysts as more representative of the health of China’s economy. EvansPritchard added that even given the different focus of the two indexes, “it’s not clear why the PMIs moved in opposite directions”. —AFP