BEIJING (Reuters) – China's vast manufacturing sector grew at the fastest pace in eight months in May, exceeding expectations and easing concerns about an economic slowdown even as the risks of trade tensions with the United States and the United States Debt repression point to a bumpy journey ahead.
The official index of purchasing managers (PMI) released on Thursday rose to 51.9 in May, from 51.4 in April, and remained well above the 50-point mark that separates growth from contraction for the 22nd consecutive month.
Analysts polled by Reuters had predicted that the reading would fall slightly to 51.3.
Production expanded at the fastest rate in six months in May, while growth in new orders increased to a maximum of 8 months, helped by the increase in commodity prices.
Strong readings in the manufacturing sector defy concerns about an expected loss of momentum in the world's second largest economy as lawmakers navigate debt risks and close trade relations with the United States.
In particular, export orders improved compared to the previous month. Some economists suspect that Chinese companies have been loading cargoes due to trade frictions between China and the United States.
In general, however, economists were skeptical about the sustainability of the strength of the industrial sector, suggesting that the economy in general will face pressures in the coming months.
"We doubt that this strength holds for a long time, since it seems to reflect mostly a temporary boost to industrial production from the relief of pollution controls rather than a change in underlying demand," said Julian Evans -Pritchard, China's Chief Economist. in Capital Economics, in a note after the release of the data.
Nomura analysts also said that the PMI's solid readings will not last long and say that "the growth of final demand, such as infrastructure and real estate investment, has plummeted in recent months, due at least in part to "
SMALL FIRMS FACE FINANCING PRESSURES
Beijing has been restricting controls on riskier investments, the shadow banking business and speculation in the real estate sector, but has been interested in maintaining the broad well-financed economy.
The industrial sector, a key source of jobs, remained healthy, with profits growing at their fastest pace in six months, underpinned by continued strength in the steel sector.
But the latest survey showed that more manufacturers were concerned about the narrowing of funds in recent months, with 40.1 percent of all firms surveyed that raised the problem in May, according to Zhao Qinghe, an official with the bureau of statistics.
"The great cost pressure remains one of the main problems faced by Chinese manufacturers these days," Zhao said.
The activity of small businesses contracted in May after expanding the previous month, while large and medium-sized companies registered positive growth.
High-tech manufacturing activity rose to 54.8 in May, up from 53.8 in April, despite the pending US tariff list under its intellectual property research and restrictions on Chinese investments in the United States. Washington said on Tuesday it was moving forward with its threat to impose tariffs on Chinese imports worth up to $ 50 billion, reviving new concerns of a trade war between the two largest economies in the world. Trade tensions had diminished only recently after Beijing undertook to buy more from the United States.
China's economy grew at a slightly faster than expected rate of 6.8 percent in the first quarter. However, signs of stress became evident, as investment growth slowed to a minimum of almost 20 years in April and growth in retail sales declined.
Driven by government infrastructure spending, a tough housing market and unexpected strength in exports, Chinese manufacturers helped the economy achieve strong growth last year.
Economists continue to expect China's economic growth to fall to 6.5 percent this year from 6.9 percent in 2017, citing higher borrowing costs, stricter limits on industrial pollution and a repression of spending of local governments to keep their debt levels under control.
Most observers in China had tipped growth to soften slightly in the second quarter, from a solid 6.8 percent in the first three months of the year. However, ANZ economists now see steady growth in the June quarter, citing support for increases in production and new orders in Thursday's PMI survey.
A similar survey showed that growth in China's service sector also accelerated in May, with the official non-manufacturing purchasing managers (PMI) index rising to 54.9 from 54.8 the previous month.
A sub-reading for construction activity, an important driver of growth in 2017, stood at 60.1 in May, down from 60.6 in April.
Chinese politicians expect the growth of services and consumption to rebalance their economic growth model from their heavy reliance on investment and exports. The service sector now accounts for more than half of the economy, with an increase in wages that gives Chinese consumers more spending power.
A composite PMI that covers both manufacturing and service activity rose to 54.6 in May, from 54.1 in April.
(To see the graph on the China economic indicator board, click on: tmsnrt.rs/2lQ48De)
Information from Stella Qiu and Ryan Woo; Editing by Shri Navaratnam