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China’s Manufacturing Expanded in August, Almost Hit Target

China’s manufacturing activity for August has continued to expand in a recovery trajectory from the coronavirus pandemic’s lockdown effects.

The National Bureau of Statistics reported that the official manufacturing Purchasing Manager Index (PMI) for August was 51.0. This compared to July’s 51.1, is a slight decrease.

Despite the expansion, a report by Reuters shows that some areas showed lag and missed expectations, with the expected PMI for august estimated at 51.2. The higher expectations for August follows outstanding performance in July. This was the fastest pace in China’s industrial firms since June 2018.

“High frequent data such as blast furnace operating and crude steel daily output continued to climb in August, likely driven by rising infrastructure demand”, stated Jiang Dongying, an analyst at CIB research.

A PMI reading of above 50 represents expansion, while any value below that represents contraction. The data can be supported by various events that occurred in August, which contributed significantly to the PMI score.

South China experienced heavy floods that impacted manufacturing and raised food prices to a yearly high of 11.1%, according to the Ministry of Commerce. Agriculture food products also rose by a total of 2%. This raised monitoring by authorities to prevent cases of social instability, which can be triggered by inflating food prices.

 

The rise in food prices cut into restaurant earnings by circa 2% points, said Gao Huan,  a senior directive on retail and manufacturing at Alvarez & Marsal consulting firm operating out of Beijing. Huan added that the increase in food prices is mainly driven by supply and demand.

Upcoming Fiscal Stimulus Will Boost Further Growth

China’s manufacturing sector is still reeling from the total lockdowns earlier in 2020. However, recent data paints a recovery picture that shows industrial output has been rising for months up to July.

China July’s industrial output rose 4.8% y/y, with sales declining by 1.1%, according to Reuter’s analysis.  Analysts expected growth to rise quickly following more gradual repointing of businesses and resumed production. Whereas the drop in retail sales was worse than the 0.1% predicted expansion.

“Sales fell for the seventh straight month in signs of sluggish consumer demand, although strict nationwide containment measures have been relaxed.”

Rebound in manufacturing was the quickest with the PMI leveling off. Just as the growth in the sector started to return to previous levels before coronavirus. This is according to Julian Evans-Pritchard, the senior China economist at Capital Economics.

Evans-Pritchard added that China could see a further increase in industrial activity. Especially after the government executes its planned fiscal support in the coming months.

“Meanwhile, it’s encouraging that the recovery is broadening out, with service sector activity now playing catch-up with industry. This is consistent with our view that an investment-led rebound would eventually also shore up consumer sentiment and household spending, keeping the overall economic recovery on track.”, said Evans-Pritchard

Meanwhile, the week has started with positive economic news for the world’s second-largest economy and the global economy, following a report by Wall Street Journal that China’s Yuan is at its strongest level in more than a year.

 

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