China factories pause for a breather

China’s manufacturing economy slowed down a notch in May, but stayed healthy enough, easing fears of overheating and offering confirmation that recent policy tightening measures aimed at “soft-landing” the economy were taking effect.

The official Purchasing Managers’ Index (PMI), which reads the pulse of China’s factories, moderated to 53.9 in May from 55.6 in April; a second index reading, released by HSBC and Markit Economics and weighted more in favour of small, privately owned businesses, registered at 52.7, the lowest level in a year.

Economists noted that May PMI readings are historically lower than April and June readings owing to public holidays in May, and the latest set of official data “may reflect the seasonality problem”; although the compiler of official data claimed to have “seasonally adjusted” the time series, the adjustment was evidently incomplete.

In any case, both data points, being above 50, flagged a manufacturing economy that’s still in healthy expansionary mode, and cooling down a tick under the influence of recent efforts to avert an economic overheating.

“The slowdown in the headline manufacturing PMI suggests that the overheating risk is likely to ease as tightening measures filter through,” observes HSBC chief China economist Qu Hongbin.

“That said, we see robust economic growth without double-dip risks not least because of massive existing infrastructure investment and resilient private consumption.”

The fact that the official PMI remained above the boom-bust threshold of 50 for the 15th consecutive month suggested that “the manufacturing sector has entered a solid expansion stage,” notes Nomura Securities analyst Sun Mingchun. The survey results, he adds, “are consistent with our view that China’s year-on-year GDP growth peaked at 11.9% in the first quarter of 2010 and will ease to a still-solid 9.6% in the fourth quarter.”

According to Barclays Capital economist Wensheng Peng, the PMI survey, together with a business survey released last week, pointed to “continued strength in manufacturing activity and rising cost pressures, but probably a moderation in the momentum of growth, reflecting the effect of policy tightening.”

Despite the seasonal distortion of data, Deutsche Bank’s Greater China chief economist Jun Ma reckons that “many people will likely take this May PMI report as a negative economic leading indicator to reinforce their views opposing interest rate hikes.”

He believes that a rate hike may not come about in June even if May CPI inflation rises to 3%—and in fact a further delay of the rate hike to the third quarter was likely.

Moody’s Economy.com analyst Alaistair Chan too says that despite the government’s attempts to “soft-land” the economy, “there are indications that the pace of cooling has been a little quicker than expected”.

Monthly indicators of industrial production and fixed investment had peaked, as had money supply growth, Chan said. Anecdotal reports suggested that although property prices were still rising the government’s measures had cut investor demand. “These cooling measures, coupled with reduced demand from Europe, are likely to result in a delay to further tightening moves.”