China - Weekly Recap: Factory Activity Loses Momentum

BMI View: We expect industrial profits growth to be temporarily supported in the coming month, before moderating further at the end of the year. Meanwhile, a slower expansion of factory activity, will likely lead to a deceleration in the economy in the second half of 2017.

Industrial Profits: According to the National Bureau of Statistics (NBS), total industrial profits expanded by 19.1% in June, up by 2.4 percentage points (pp) from May. We expect industrial profits growth to be temporarily supported in the coming months, before moderating further at the end of the year. Our view on industrial profits is partly driven by our outlook for commodity prices, and our Commodities team expects industrial metal prices to be temporarily supported, before losing steam later on in the year (see 'Weekly Global Commodities Strategy', July 27). In addition, the central bank's decision to maintain tighter monetary conditions will likely lead to higher financing costs. Financial expenses grew by 9.7% y-o-y in June, up by 4.6pp from May.

PMI: China's manufacturing purchasing managers' index (PMI) released by the NBS came in at 51.4 in July, which was lower than the 51.7 figure registered in June. We maintain our expectations for the expansion of the manufacturing sector to moderate over the coming months as tighter credit conditions and a pullback in expansionary fiscal policy will likely weigh on the sector, especially on small manufacturers. Indeed, the breakdown of enterprises by size showed that activity in small- and medium-sized manufacturers contracted in July, with PMI coming in at 48.9 and 49.6, respectively. Additionally, the overall production sub-index dropped by 0.9pp to 53.5 in July. Meanwhile, the new export orders sub-index decreased by 1.1pp to 50.9 in the same month, suggesting that external demand weakened compared to prior months.

The non-manufacturing sector also expanded at a slightly slower pace in July, with the PMI falling by 0.4pp to 54.5. However, according to releases from the NBS, the services business activity sub-indices for postal, telecommunications, and internet and software technology stood above 60.0 in July. As the country gradually shifts towards a consumption-led economy, we expect the performance of the non-manufacturing sector to remain robust.

Latest Developments

  • On July 26, the China Security Regulatory Commission (CSRC) said that it would maintain the 'normalisation' of initial public offerings (IPO), improve the mechanism for delisting shares from the stock market, and steadily expand the opening of capital markets.
  • On July 28, the Ministry of Human Resources and Social Security reported that China's urban unemployment rate was 3.95% at the end of June, unchanged since the end of March and slightly lower than 4.05% a year earlier.
  • On July 28, Reuters reported that Guangzhou, Wuxi, and Zhengzhou have announced that registered tenants are eligible for household registration and can enrol their children in local schools and enjoy other public services under certain conditions.
  • On July 28, the Shanghai Exchange stated that the first asset-backed security for public-private projects (PPP) has been issued, with an amount of CNY1.5bn.
  • On July 28, the China Insurance Regulatory Commission said that it would monitor the asset liability management of insurers more closely by setting up a committee and drafting additional rules. The new set of regulations will be put into effect at the beginning of 2018.
  • On July 29, the CSRC approved the IPO applications of nine companies, which will raise up to CNY4.3bn.
  • On July 29, the National Development and Reform Commission stated that China shut 42.4mn tonnes of crude steel capacity in the first half of 2017, which was equal to 84% of its target for the whole year.
  • As of July 30, there were 13,554 PPP projects worth a total of CNY16.3trn being worked on, according to data from the China Public Private Partnerships Centre. More than 34% of these projects have reached the implementation phase.
  • On July 31, Yang Huanning was removed from his role as the director of State Administration of Work Safety due to a violation of political discipline, according to a statement published by the Central Commission for Discipline Inspection.

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