China manufacturing activity accelerates in June, with official PMI at 51.7, beating expectations

Key Points
  • China's official manufacturing PMI for June rose to 51.7, accelerating from 51.2 in May and beating a Reuters poll forecast for 51.0.
  • China's official services PMI for June rose to 54.9 from 54.5 in May.
A Chinese steel worker helps load steel rods onto a large truck for transport at a plant in Tangshan, Hebei province, Chin
Kevin Frayer | Getty Images

China's manufacturing activity accelerated more than expected in June, suggesting the world's second-largest economy continues to confound expectations for a slowdown.

The official manufacturing Purchasing Managers' Index rose to 51.7 in June, accelerating from May's 51.2 and beating a Reuters poll forecast for 51.0.

Levels above 50 indicate expansion, while levels below signal contraction.

In the services sector, the official services PMI for June rose to 54.9 from May's 54.5.

While the manufacturing PMI data tends to be more closely watched, China's pivot toward domestic consumption and away from investment-led growth means the services sector accounts for a bigger slice of the mainland economy. The services sector includes consumer industries such as real estate, retail and leisure.

It is also a key barometer of consumption, accounting for more than 50 percent of gross domestic product (GDP).

"Today's official PMI readings suggest that growth may have held up reasonably well this month," Julian Evans-Pritchard, a China economist at Capital Economics, said in a note on Friday, adding that the reading was consistent with other data he tracked.

"The breakdown suggests that stronger foreign demand is helping to support manufacturing activity – the new export orders increased by a larger margin than overall new orders," he said.

"But there are hints of an improvement in domestic demand too – the import index rose to a four-month high. Finally, the price components both increased for the first time since December, suggesting that downward pressure on producer prices may now be easing."

But Evans-Pritchard noted that official PMIs, which focus primarily on larger, often state-owned, companies, have sometimes provided false signals and he said he was waiing for the private Caixin manufacturing PMI survey, due on Monday, for a clearer reading.

The Caixin PMI tends to focus on smaller, private companies.

Betty Rui Wang, a senior China economist at ANZ, also expressed some skepticism about the data in a note on Friday.

She said the surprise acceleration in manufacturing PMI was mainly on higher production and new-order sub-indexes, which masked an uneven recovery across sectors.

"Traditional sectors including crude oil, chemicals, and non-metal mineral sectors continued to contract during the month. The producer price sub-index remained at a low level (June: 49.1 vs May: 47.6) although it has edged up in the month," she said.

Wang added that moderation in second-quarter GDP growth is "inevitable," as the average manufacturing PMI in the period slipped to 51.4 from the first quarter's 51.6.

She forecast second quarter GDP growth at 6.7 percent on-year.

In the first quarter, China's GDP grew 6.9 percent on-year, slightly faster than the 6.8 percent forecast in a Reuters poll and the fastest pace since the third quarter of 2015.

The government is targeting growth of around 6.5 percent for this year, compared with last year's target of 6.5-7 percent, Reuters reported, noting that 2016's growth was at 6.7 percent, the weakest for 26 years.

Concerns over China's economy have grown as policy makers' stimulus efforts have also spurred a leverage buildup.

In a note on Monday, Nomura estimated that China's outstanding non-financial sector debt hit 191.3 trillion yuan ($27.96 trillion), or 251 percent of gross domestic product (GDP) in the first quarter, up from 158.3 trillion yuan, or 231 percent of GDP, at the end of 2015.

Last month, Moody's Investors Service expressed concern that China's effort to support economic growth would spur higher debt levels, and the ratings service downgraded the mainland's sovereign credit rating to A1 from Aa3, changing its outlook to stable from negative.

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