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Economy

China's robust factory activity masks economic risks

Job market remains weak while economic stimulus is set to scale down

Factory activity has picked up in China since the coronavirus ebbed, but private- and public-sector surveys differ on the speed of the recovery.   © Reuters

BEIJING -- A measure of Chinese factory activity surged last month to its highest level in nearly a decade, according to a private-sector survey, but official data and the job market tell a different story.

The Caixin/Markit Manufacturing Purchasing Managers' Index jumped 1.6 points to 52.8 in July, a high not seen since January 2011. The PMI has climbed for three consecutive months, thanks to substantial improvements to production and new orders.

"Although there were outbreaks of the novel coronavirus in some areas, there has been no significant change to the economic recovery trend," said Wang Zhe, senior economist at the Caixin Insight Group, referring to the clusters of infections in Beijing and Dalian in recent weeks.

Caixin releases the PMI in conjunction with the British analytics group IHS Markit. Such independent snapshots draw a large proportion of their data from private companies, with the results said to be highly reflective of business sentiment among small and midsize enterprises.

Another PMI released by the Cheung Kong Graduate School of Business shows the index rising 2.3 points in July to 51.4. That index, which heavily surveys private companies as well, improved for five straight months until it rose above the boom-or-bust threshold of 50 for the first time since January.

However, the government's PMI for July only climbed 0.2 point in July to 51.1. Among small-to-midsize enterprises, the index dropped 0.3 point to 48.6, wallowing beneath the "50" line for two straight months.

"The deficiency in demand continues to stand out as a problem," said Zhang Liqun, researcher at the Development and Research Center of the State Council, a state think tank.

The discrepancy in private- and public-sector PMIs likely stems partly from the differences in the indexes' samples. The government's PMI covers 3,000 businesses -- leaning toward state-owned enterprises -- while private PMIs survey only around 500 enterprises. Private PMI figures have fluctuated sharply in the past.

The Caixin index's nine-and-a-half-year high comes as the Chinese economy has only recently reopened from a coronavirus lockdown. Almost no one feels the economy is as strong as it was in 2011.

The Caixin and government surveys both flag weakness in the job market. The employment indicator has come in below 50 for seven months in a row in private surveys, and for three consecutive months in the state statistics, indicating that the number of jobs continues to fall.

"The recovery in production and demand has not led to improvement in employment," said Wang. "A portion of companies are reluctant to expand hiring even though they are increasing production."

Uncertainty in employment is tied to slower recovery in private consumption.

Top leaders of the Chinese Communist Party signed off last week on an economic policy road map for the second half of the year, which hinted at scaled-down monetary and fiscal stimulus programs. The move was made in response to asset bubbles seen in Shenzhen and other cities that were flooded with investment funds.

Real estate construction drove the expansion of China's gross domestic product in the second quarter through June. In terms of fixed-asset investments, the metric for real estate rose 2% on the year during the first half, but such activity in infrastructure and manufacturing declined during the same period.

The construction industry attained 7.8% growth in the second quarter, the fastest rate in four years. Contractors have been flush with orders to build condominiums.

Following the coronavirus epidemic, regional governments continued to ostensibly maintain restrictions on condo sales while quietly loosening enforcement of those rules. Then in mid-July, Shenzhen rolled out a strict clampdown on residential property transactions.

"Real estate deals will fall in the July-September quarter compared with the April-June quarter due to stronger restrictions," said Leif Chang at Japan's Nomura International.

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