China’s factory sector grew at its fastest pace in six months, in the latest sign that recent stimulus policies have steadied Chinese economic growth.
China’s official purchasing managers’ index, which mainly surveys large, state-owned companies, hit 51 in June, up from 50.8 in May and the highest level since December, according to the National Bureau of Statistics.
The country’s factory surveys are seen as a key indicator of wider economy growth, given that the world’s second-largest economy remains heavily dependent on manufacturing.
“The improvements in PMI confirm our view that the policy easing rolled-out has helped stabilise growth momentum; we expect gross domestic product growth of 7.4 per cent year-on-year in the second quarter, unchanged from the first quarter,” Zhang Zhiwei, China economist for Nomura in Hong Kong, said in a note on Tuesday.
Apart from the stimulus policies announced publicly, China’s Premier Li Keqiang has also urged local officials to step up efforts to ensure they meet the annual 7.5 per cent GDP growth target. Analysts had previously believed that target was more flexible.
The separate HSBC/Markit PMI for June, which is weighted towards smaller manufacturers, hit a seven-month high at 50.8, up from 49.4 in May and the first reading since December to surpass the 50 level that separates expansion from contraction.
New orders provided the biggest boost to both PMIs, posting their highest reading in the official survey since September, hinting that factory output is likely to remain strong in the months ahead.
Export orders were weaker, however, signalling a possible slowdown in external demand following several months of strong export growth.
Recent “mini-stimulus” measures include cuts in the required reserve ratio for smaller banks, central bank loans to commercial lenders and increased spending on infrastructure.
On Monday, China’s banking regulator also announced a technical change to the way banks calculate their loan-to-deposit ratio, loosening the requirement to allow banks to lend more while still remaining under the legal maximum 75 per cent ratio.
The stimulus moves have mainly targeted sectors that the government believes are most in need of cash, in particular small businesses, agriculture and infrastructure projects such as railway and urban redevelopment.
In spite of the improvement, analysts expect the government to soon proceed with further targeted stimulus measures.
“There are still downside risks from a slowdown in the property market, which will continue to put pressure on growth in the second half of the year,” said Qu Hongbin, chief China economist for HSBC.
“We expect both fiscal and monetary policy to remain accommodative until the recovery is sustained.”
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