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Economy

Chinese economic outlook still bright as manufacturing cools

Analysts see PMI drop-off as a temporary setback

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Workers survey a construction site in Beijing.   © Reuters

HONG KONG -- Even with China's manufacturing sector decelerating more than expected in July, analysts do not see the economy making a similar slowdown in the second half.

Inside the numbers

July's official manufacturing purchasing managers index, released Monday by the National Bureau of Statistics, declined 0.3 point on the month to 51.4. While the reading still stayed above the boom-or-bust line of 50, the drop exceeded market expectations.

Among PMI components, the production index dipped 0.9 point to 53.5, while the new-orders index retreated 0.3 point to 52.8. The index for new export orders fell 1.1 point.

Gross domestic product grew 6.9% on the year in each of the first two quarters of 2017, beating analysts' expectations. Beijing has set a full-year growth target of around 6.5%.

But in an effort to limit financial risk ahead of a key Communist Party congress this autumn, the nation's leadership is tightening its grip on the real estate market and financial institutions. Many observers had thought that the clampdowns would lead to an economic slowdown in second half.

July's lackluster PMI should have given proof to these fears. But experts in general have been unexpectedly bullish. One reason is the view that July's figure is just a temporary setback. Senior NBS statistician Zhao Qinghe said the number of hot days that month, combined with flooding in parts of the country, had an impact on production activities.

Analysts also point to how the global economy is on a solid footing. At 50.9, July's index for foreign new orders is higher than the year-earlier 49. Although the index did drop from the 52 of June, that month was an outlier representing a roughly five-year high.

Chinese exports will likely remain resilient as the international economy picks up, especially in Europe, said Hao Hong, head of research at Bocom International Securities. American real economic growth accelerated in the second quarter compared with the first.

No trade war, no problem

U.S. President Donald Trump has been castigating China over its approach to North Korea, which carried out two test-firings of intercontinental ballistic missiles in July. Anticipation is running high that the White House will once again rip into Beijing over the massive trade imbalance.

But Trump also faces questions over his ability to implement his stated agenda, said Hong, who noted that China's status as a key trading partner puts Washington in a difficult position to sour relations.

The last factor propping up the economic outlook is how Chinese concerns over deflation have largely subsided. The PMI's raw-materials purchase price index and shipment price index have both jumped by significant margins. Rising steel prices are underpinning producer prices, according to Julian Evans-Pritchard of Capital Economics.

China has successfully cut excess capacity in iron ore, copper and elsewhere, giving prices a lift. The most-traded iron ore futures on the Dalian Commodity Exchange spiked roughly 20% in July alone. Industrial reforms paired with improved corporate earnings are informing the trend.

The lower PMI caused hardly a blip in the stock market. The Shanghai Composite Index ended Monday at a three-and-a-half-month high, while Hong Kong's Hang Seng Index added more than 1% to close at a 25-month high.

Housing prices in such large cities as Beijing and Shanghai are starting to fall, presenting an economic hazard in the second half. But a widely held view in the market is that steady internal and external demand will offset that risk and provide a soft cushion.

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