China’s factory growth eases as tough pollution measures bite

BEIJING-Reuters

Growth in China’s manufacturing sector slowed slightly in December as a punishing crackdown on air pollution and a cooling property market start to weigh on the world’s second-largest economy.

The data support the view that the economy is beginning to gradually lose momentum after growing by a forecast-beating 6.9 percent in the first nine months of the year, but the findings did not appear to suggest there is a risk of sharper slowdown at this point.

The official Purchasing Managers’ Index (PMI) released on Dec. 31 dipped to 51.6 in December, down from 51.8 in November but in line with forecasts from economists in a Reuters poll.

But the overall reading still appeared relatively solid, and marked the 18th straight month that the sector has expanded. The 50-point level divides growth from contraction on a monthly basis.

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 solid economic growth this year, with their strong appetite for raw materials boosting global commodity prices.

However, a slowdown has started to take hold in the last few months due to a wide-ranging combination of government measures, from the crackdown on smog in heavily industrialized northern provinces to continued curbs on the housing market which are weighing on property investment.

Chinese steelmakers in 28 cities have been ordered to curb output between mid-November and mid-March, while a campaign to promote cleaner energy by converting coal to natural gas has also hampered manufacturing activity in some cities, leading to shortages and sending prices spiking.

Still, there are signs that steel mills, smelters and plants in parts of the country with fewer restrictions have ramped up production to win more market share, largely offsetting the “rustbelt” declines on a nation-wide basis.

The central bank nudged up interbank rates earlier this month for the fourth time this year, though policymakers are keen not to tap the brakes too sharply and risk a sharper economic slowdown.

Sources have told Reuters that Chinese leaders are likely to stick with a growth target of around 6.5 percent for 2018, the same as in 2017, even as they continue efforts to defuse the risks from a rapid build-up of debt.

In a further sign of resilience, growth in China’s services sector, which was already robust, kicked up another notch in December, a sister survey showed.

The official non-manufacturing Purchasing Managers’ Index (PMI) rose to a robust 55 from 54.8 in November.

A sub-reading for the construction sector rose to 63.9 from 61.4 in November, which was surprising given slowing property investment and seasonal declines in building activity usually seen in colder months.

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.