Are China’s factories back to business? A manufacturing gauge out today suggests so, and that’s good news for the country’s nascent recovery. An early look at a survey of purchasing managers, released March 21 by HSBC Holdings and Markit Economics, shows that business is improving. The reading of 51.7 is up from a 50.4 final reading for February and above the 50.8 predicted by a Bloomberg News survey of analysts.
The so-called “Flash PMI” covers up to 90 percent of the more than 420 companies surveyed every month. The final number will be reported April 1, with a reading over 50 showing expansion. “The Chinese economy is still on track for gradual growth recovery,” said Qu Hongbin, chief China economist for HSBC (HBC) in Hong Kong, in a statement. “Inflation remains well behaved, leaving room for Beijing to keep policy relatively accommodative in a bid to sustain growth recovery.”
Worries had risen that China’s recovery was flagging following the release of weak data for the first two months, including industrial production that grew 9.9 percent, its slowest rate since the beginning of 2009, and retail sales that increased 12.3 percent, the smallest lift in nine years.
Now the manufacturing gauge results, along with a 6.3 percent jump in foreign direct investment into China in February, the first rise in nine months, is spurring cautious optimism. “The growth recovery is not over, although it is not a very strong one,” Yao Wei, China economist at Société Générale (GLE:FP) in Hong Kong told Bloomberg News. “Now it is clear that the weak reading in February was indeed a result” of the Chinese New Year holiday.
Still, concerns about potential pitfalls to growth remain strong. In his last nationwide address, speaking before the National People’s Congress on March 5, now-retired Premier Wen Jiabao warned that China faces challenges from “unbalanced, uncoordinated, and unsustainable development” along with “potential risks in the financial sector.”
A key fear: that China’s unregulated shadow banking sector could flare as a source of economic instability later this year. China’s banks have increasingly relied on off-balance-sheet financing, and particularly on wealth-management products—the outstanding balance of such products could have reached 13 trillion yuan ($2.09 trillion) as of the end of last year, up from 8.5 trillion yuan a year earlier, according to Fitch Ratings.
“China’s shadow banking sector has become a potential source of systemic financial risk over the next few years,” wrote Xiao Gang, then chairman of the Bank of China, in a China Daily commentary last October. “Particularly worrisome is the quality and transparency of wealth management products,” wrote Xiao, who was appointed on March 17 as chairman of China’s securities regulatory agency.
Also a major concern: that a surge in property prices will spur Beijing to strengthen a crackdown on the real estate sector, a major driver of the Chinese economy. On March 1, China tightened mortgage requirements and raised down payments for purchasers of second homes and said it will enforce a property sales tax. That followed nine straight months of rising prices.
“What gets most of [the government’s] attention now is the increase in housing prices and the perception that not all is well in the shadow banking sector—and that risks have increased with the very large expansion of it,” says Louis Kuijs, chief China economist at Royal Bank of Scotland (RBS:LN) in Hong Kong. Those concerns could tempt Beijing to tap the brakes slowing growth, even before the still-nascent recovery has gained sustainable momentum.