The official manufacturing Purchasing Managers' Index is in for August and the numbers are rosy. Sell-siders are happy. China bulls just got one more boost from a lengthening list of comfortable economic figures. “It's a real recovery,” they shout.
The numbers are indeed encouraging. But is it the right kind of recovery? And who exactly is seeing a turnaround?
Manufacturing PMI was 51.0 last month, up from 50.3 in July. A reading above 50 shows that manufacturing is expanding, while below 50 signals contraction. The figure beat most estimates. It also accompanies several other data points that have revived the hopes for a better outlook at year's end. GDP growth hit 7.5% in the second quarter of the year, beating analyst expectations across the board.
Yet Sunday's PMI release tells another tale as well, one that China is all too familiar with. Large enterprises were the drivers behind the increase in production, not smaller companies. China's biggest firms buoyed the figure last month with a 51.8 reading, up from 50.8 the month before.
Production at small companies actually contracted. The index fell to 49.2 in August from 49.4 in July. At medium-sized firms, activity shrank slightly for the second month in a row, showing again that a recovery is good as long as you are a big, preferably state-owned enterprise.
The better-than-expected uptick in production at big companies can largely be attributed to the habits China just can't quit, namely big infrastructure investments and construction.
“[The PMI data] is consistent with the view that stronger growth recently is due to a turnaround in construction and investment, which usually benefits larger firms,” Mark Williams, chief Asia economist at London-based Capital Economics, said in a note on Monday.
Earlier this year, after much talk of weaning the country off of a high rate of investment as a source of growth, the government came out and said it would target specific areas of the economy for stimulus. That included subsidized housing, green energy and technology. Railways took an enormous investment boost in late July.
At the same time, property prices continue to climb and developers have seen high profit growth in the first six months. In some places, government curbs on financing for construction firms have been lifted. July PMI no doubt relished the help.
One cautionary word however on the PMI figures, even regarding the data for large companies: To stay in expansionary territory will require the government to leave on the spigot of cheap cash to banks. There's no guarantee that will happen.
“Right now the major reason the market is looking more positive is because of infrastructure investment. But I think most of it is more about anticipation rather than something that can really materialize,” Yao Wei, chief economist at Societe Generale, said on Monday from Hong Kong. “If credit growth cannot pick up, then where can the money come from to support this?”
