December 30, 2019 / 7:22 AM / 2 months ago

China's December factory activity set to expand for a second month: Reuters poll

BEIJING (Reuters) - China’s factory activity likely expanded again in December on stronger external demand and an infrastructure push at home, but the pace of growth is set to ease as markets await more certainty on a U.S.-China trade truce, a Reuters poll showed.

FILE PHOTO: A worker welds automobile parts at a workshop manufacturing automobile accessories in Huaibei, Anhui province, China June 28, 2019. REUTERS/Stringer

The official Purchasing Managers’ Index (PMI) for December is expected to come in at 50.1, slightly above the 50-point mark that separates expansion from contraction on a monthly basis, according to the median forecasts of 27 economists.

This would be notch below November’s 50.2, which unexpectedly ended six straight months of contraction as Beijing’s accelerated stimulus measures buoyed domestic demand.

The recovery has been supported by a rebound in external demand, a pick-up in infrastructure investment, a still-resilient property market, and a moderate inventory restocking cycle propelled by improved growth expectations, analysts at China International Capital Corp (CIIC) said in a note.

The United States and China cooled their trade war earlier this month, announcing a “Phase one” agreement that reduces some U.S. tariffs in exchange for what U.S. officials said would be a big jump in Chinese purchases of American farm products and other goods.

Zhang Deli, a macro analyst with Guangdong-based Lianxun Securities, noted that a weekly export container shipping index tracked by the Shanghai Shipping Exchange - the China Containerized Freight Index - rebounded sharply in December, pointing to improved export demand.

But it remains unclear when and where the formal signing of a trade deal will take place, and no “Phase two” deal, which would involve tougher topics such as forced technology transfers to U.S. firms, is in sight.

Growth in China’s industrial and retail sectors both beat expectations in November.

A private business survey - the Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) - which analysts say focuses more on small- and medium-sized, export-driven Chinese firms - is also expected to show factory activity expanded in December.

But it is also forecast to show slightly more subdued growth than the previous month at 51.7, down from 51.8 in November.

The economy could face bigger downward pressure next year, Premier Li Keqiang said this month, underlining Beijing’s challenge to stabilize growth and support employment. A separate Reuters poll showed China’s GDP growth is expected at 6.2% in 2019, slowing to 5.9% in 2020.

After lowering its lending benchmark rate in November, China kept it unchanged in December, but markets widely expect further monetary easing in 2020.

On Saturday, the central bank said it would use the loan prime rate (LPR) as a new benchmark for pricing existing floating-rate loans, paving the way for more rate cuts next year.

Premier Li also stressed last week the need to lower funding costs for smaller firms, including by implementing more broad-based and targeted cuts in the amount of cash banks must deposit as reserves.

The annual Central Economic Work Conference, a closed-door gathering of top leaders and policymakers, concluded this month that China will keep economic policies stable but make them more effective in 2020.

Beijing plans to set a lower economic growth target of around 6% in 2020 from this year’s 6%-6.5%, relying on increased state infrastructure spending to ward off a sharper slowdown, policy sources told Reuters.

The official PMI and its sister survey on the services sector will be released on Tuesday.

The Caixin manufacturing PMI will be published on Jan. 2 and the Caixin services PMI survey will be out on Jan. 6.

Reporting by Yawen Chen and Kevin Yao; Additional Reporting by Stella Qiu; Editing by Richard Pullin

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