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China’s November factory growth picks up despite pollution crackdown

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BEIJING — Growth in China’s factory sector unexpectedly picked up in November, despite a crackdown on air pollution and a cooling property market that have been expected to weigh on the world’s second-biggest economy.

The upbeat data should help ease concerns, for now, that Beijing’s campaign to curb excess risk in the financial sector and its punishing war on smog could lead to a sharper-than-expected slowdown in China’s economy.

“A lot of people (predicted) a cyclical slowdown, but we haven’t seen that… it looks like the current momentum can be sustained until at least early next year,” said Zhou Hao, senior Asia emerging markets economist at Commerzbank.

The official Purchasing Managers’ Index (PMI) released on Thursday stood at 51.8 in November, compared with 51.6 in October.

It remained above the 50-point mark that separates growth from contraction on a monthly basis for the 16th straight month.

Analysts surveyed by Reuters had forecast it would come in at 51.4, easing for a second straight month after September’s more than five-year high.

Boosted by hefty government infrastructure spending, a resilient property market and unexpected strength in exports, China’s manufacturing and industrial firms have been a major driver behind the economy’s forecast-beating growth of nearly 6.9% so far this year.

November’s strong reading was led by high-tech and consumer goods manufacturing.

October economic data disappointed analysts as investment, industrial output and export growth slowed, raising concerns that a long-expected slowdown had begun, though Thursday’s PMIs suggested there was still solid momentum in China’s massive manufacturing sector.

Still, some economists see fourth-quarter economic growth moderating to around 6.6%, and slowing further to 6.4% in 2018, as borrowing costs rise and the boost from earlier infrastructure projects begins to fade.

“We doubt the current momentum in manufacturing will be sustained given that the sector faces increasing headwinds in the months ahead from the anti-pollution crackdown, slower credit growth, reduced fiscal support and a cooling property market,” Capital Economics economist Julian Evans-Pritchard wrote in a note.

A senior banking regulator said on Thursday that China’s economy could face downward risks as soon as the first quarter next year as the economy struggles for sustainable growth in the face of government efforts to deflate asset bubbles.

PRICE BOOST
For now, though, strong commodity prices are continuing to boost the performance of industrial firms such as steelmakers, which have cranked up production to cash in on robust profit margins.

While some mills, smelters and factories in northern provinces have been forced to curb output to reduce winter smog, there are signs that their counterparts in other parts of the country have ramped up output to gain market share.

A separate PMI on the steel sector rose to 53.1 in November from 52.3 in October, while a reading on steel raw materials jumped 12.6 points to 56.7.

Indeed, Chinese steel futures jumped nearly three percent on Wednesday to their strongest level since mid-September as winter curbs reduced stockpiles to the lowest in years.

Profits for China’s industrial powerhouses surged 25.1% in October, down only slightly from September’s nearly six year high, as coal mining and other upstream sectors continued to benefit from high prices.

Earnings have been boosted by surging factory gate prices, though the latest survey showed input price gains slowed, with the reading at 59.8 compared to 63.4 in October and the lowest since July.

Output price gains also slowed, reflecting concerns that higher commodity prices have not trickled down to higher prices and profit margins for downstream industries.

The latest pollution closures come on top of ongoing government efforts to trim down and upgrade the country’s bloated industrial sector by shutting down outdated capacity, which also has helped support producer prices.

A sub-reading for output rose to 54.3 in November from 53.4 the previous month as factories continue to expand production.

Readings for total new orders, new export orders and imports also quickened.

The PMI showed that large firms continued to be the best performers in November, though the gap between smaller firms narrowed from the previous month.

But the environmental crackdown is creating uncertainty for industrial firms, with an executive at the nation’s largest integrated copper producer Jiangxi Copper saying costs are going higher as emissions standards rise.

A sister survey also showed activity in China’s service sector accelerated at a faster rate in November, reinforcing the view that any slowdown in the economy would be gradual.

The official non-manufacturing Purchasing Managers’ Index rose to 54.8 from 54.3 in October.

A sub-reading for the construction sector rose to 61.4 from 58.5 in October.

The services sector accounts for over half of China’s economy, with rising wages giving Chinese consumers more spending power.

China’s leaders are counting on growth in services and consumption to rebalance their economic growth model from its heavy reliance on investment and exports. — Reuters

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