Activity levels across China’s manufacturing and non-manufacturing sectors remained firm in May, hinting that a recent lift in borrowing costs has yet to have an impact on the broader economy.
According to China’s National Bureau of Statistics (NBS), the nation’s manufacturing Purchasing Manager’s Index (PMI) came in unchanged at 51.2 in May, topping expectations for a decline to 51.0.
The PMI measures changes in activity levels across China’s manufacturing sector from one month to the next. Anything above 50 signals that activity levels are improving while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.
So at 51.2, activity levels improved at the same pace as April, albeit at a modest pace.
It was also the 10th consecutive month that activity levels improved from a month earlier, indicating that conditions across China’s industrial sector are gradually improving after a prolonged period of weakness in 2015 and early 2016.
Both new orders and new export orders continued to expand while the pace of job losses showed.
However, the report said that prices for raw materials declined for the first time in more than a year, all but cementing the view that the recent inflationary spurt from higher commodity prices is now unwinding.
That’s something that will have implications for global export prices, and with it global inflationary pressures.
While the internals of the manufacturing report were mixed, the separate non-manufacturing PMI — including other parts of the Chinese economy including the construction sectors — largely impressed, rising to 54.5 from 54.0 in April.
The NBS said that new domestic orders expanded at a slightly faster pace, while those from outside the country declined at a slower pace.
As a lead indicator, that suggests activity levels will remain firm in the months ahead.
Despite the boost in activity across the sector, the NBS said that employment levels fell at the fastest pace since July last year, albeit it was very modest in scale.
As seen in the chart below, activity levels have never deteriorated across China’s non-manufacturing sectors, at least according to the government’s figures.
Released alongside the manufacturing and non-manufacturing reports, the government also released its monthly steel industry PMI — a gauge of activity levels across China’s steel industry.
It too put in a strong performance, rebounding from 54.8 to 49.1 in April.
That indicates that after declining mildly last month, activity levels improved sharply during May, led by a surge in domestic orders.
The triple-beat on all PMI reports has helped to boost risk assets across Asia, although the gains to date have been muted.
This suggests that there may be a degree of scepticism over the accuracy of the reports, something that has become more prevalent among investors outside of China in recent years.
The decision from ratings agency Moody’s to downgrade China’s sovereign credit rating last week, and some subsequent unusual movements in Chinese financial markets that followed the news, has only helped to fuel that scepticism.
It’s likely that many investors will be eyeing the release of separate manufacturing and services PMI reports from private-sector firm IHS Markit in the coming days to see whether the government’s figures marry up.