China: High industrial sentiment – just a flash in the pan?

The latest survey findings in China were a real surprise this morning: The sentiment figures polled by private service provider Markit for manufacturing made a real leap in July and, starting from the relatively low level of 48.6 points, jumped two full index points to 50.6 points. In other words, for the first time in one and a half years the indicator is now back above the growth threshold of 50 index points, and last saw such a strong surge back in summer 2013. Almost all the sub-components of the purchasing manager index improved on the month, and most of all the sub-indices for production output and new orders. So is everything in fine fettle in China?

We did not expect a rise in the indicator, but would not take the current surprising brightening in sentiment to mean that we should opt for a more upbeat assessment of China’s economic situation then hitherto. For example, it is worth taking a look at the industrial climate survey published by the Chinese statistics office, which also came out this morning and was polled during the same period – the so-called “official” purchasing manager index. Although this indicator tends to report better figures than the Markit Index, it actually lost a little ground on the June level and once more closed beneath the expansion threshold at 49.9 points as against 50 points the prior month. The two purchasing manager indices thus paint completely different pictures on sentiment, something that has to date hardly ever happened on such a scale. It therefore remains to be seen to what extent the change in sentiment to which the Markit indicator points does in fact endure or instead is subject to correction in the coming months.

For the time being we are therefore sticking with our assessment that Chinese economic growth will continue to gradually slow in the current second half of the year. The government investment measures that buttressed the economic cycle in past months will slowly run out of steam, while the private sector is at present showing great restraint on the investment front. The current rise in the Markit PMI could be a first glimmer of hope that the private sector, which is weighted higher in this survey than in the parallel poll by the statistics office, is looking to the future with a little more confidence again. The willingness to invest could also benefit from this. However, private investment activities have of late hardly done more than stagnate, meaning that there is a long way to go before private-sector investments make a tangible positive contribution to growth. And given that the government budget deficit was already over 3 percent of economic output last year and this year looks set to move also through the 4-percent mark, even for Beijing the scope for the government to stimulate the economy will become smaller.

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