China June factory activity shows signs of stabilisation

By Pete Sweeney

SHANGHAI (Reuters) - China's factory activity showed signs of stabilising in June, with two private surveys suggesting the economy may be regaining some momentum even as many analysts expect further policy support to ensure the recovery becomes more sure-footed.

The HSBC/Markit Flash China Manufacturing Purchasing Managers' Index (PMI) edged up to 49.6 in June, a three-month high, from 49.2, but remained below the 50 mark which separates contraction from expansion.

New orders returned to positive territory at 50.3 and new export orders fell at a much slower pace.

"The pick-up in new orders was driven by a strong rise in the new export orders subcomponent, suggesting that foreign demand may finally be turning a corner," wrote Capital Economics analysts in a research note.

"Today's PMI reading reinforces our view that the economy has started to find its footing."

However, companies stepped up layoffs, shedding jobs at the fastest pace in over six years, and Capital Economics' analysts said they expect further easing measures in the pipeline.

"Manufacturers continued to cut staff. This suggests companies have relatively muted growth expectations," said Annabel Fiddes, an economist at Markit, adding that she expects Beijing to "step up their efforts to stimulate growth and job creation."

ROSY BEIGE BOOK

However, the China Beige Book quarterly survey painted a much rosier picture, describing a "broad-based recovery" in the second quarter, led primarily by provinces in China's interior.

"Among major sectors, two developments stand out: a welcome resurgence in retail - which saw rising revenue growth despite a slip in prices - and a broad-based rebound in property," report authors Leland Miller and Craig Charney wrote, adding that manufacturing, services, real estate, agriculture and mining all saw both year-on-year and quarterly gains.

"Overall, firms continue to do better than official data -and its legions of sell-side users - might suggest."

Miller has recently argued that stimulus cannot solve China's economic challenges and will be unlikely to have the desired effect on investment, given weak demand.

Indeed, much of the easing measures appear to have been absorbed by a stock market rally, and now the bond market - which is being force-fed a massive plate of municipal bonds to help relieve heavily indebted local governments.

China cut interest rates for the third time in six months in May, in a bid to lower companies' borrowing costs and stoke a sputtering economy that is headed for its worst year in a quarter of a century.

Markets expects Beijing to step up policy support. A major headache is the reluctance of Chinese executives to invest in expansion or productivity due to low returns and higher long-term borrowing costs,

"Real interest rates are double digits, 11 or 12 percent. This is the real issue for the economy. You can cut nominal rates to zero and you are still seeing real rates around 5 percent. The profit margin is only around 3-4 percent," said Zhou Hao, economist at ANZ Bank in Shanghai.

"We are still seeking new engines for the economy. Basically we need to deleverage first," he said.

(Reporting by Pete Sweeney; Editing by Kim Coghill & Shri Navaratnam)