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The assessment of business conditions among executives at China’s largest companies rebounded in June as the tailwinds of looser policy in the first two quarters of 2016 boosted sentiment. The veneer of the rise was tarnished somewhat by underlying components which showed measures of output and demand remaining sluggish.
The MNI China Business Sentiment Indicator rose 9% to 54.5 in June from 50.0 in May, leaving it at the highest since October 2015. The increase leaves average confidence over Q2 at 51.7, slightly better than 50.7 in Q1 but not enough of an improvement to suggest that the signs of life that emerged earlier in the year have manifested into significant economic momentum. Aside from the latest outturn, sentiment has only been above the 50 breakeven level twice this year, although the June outturn does leave it running more than 5% higher than the average over the past 12 months.
Further detail in the survey highlighted the growing divide between real activity and monetary conditions. Production declined 2% on the month to 54.7 while New Orders managed a 0.7% rise to 55.0. In contrast, the interest rate companies paid plunged, leaving the Interest Rates Paid Indicator back at the historically low level reached earlier in the year at 37.9. After picking up considerably since the second half of 2015, the Availability of Credit Indicator fell back 3.6% to 50.5. Better terms of credit and a rise in the prices firms received offset the setback in Production and left the Financial Position Indicator up 1.8% at 51.3.
The malaise in output meant that companies reduced their hiring plans and a roughly equal proportion felt that their current workforce was adequate to meet current production requirements as those who thought they needed more. The Employment Indicator fell 2.5% to 50.6 in June while Future Expectations for Employment fell 2.2% to 49.5. Despite the reassessment of labour requirements, more companies felt that overall business conditions would improve in the next three months, with the Future Expectations Indicator up 6.8% to 58.3.
Since the PBOC adjusted its exchange rate policy, and the subsequent devaluation of the yuan, firms on our panel have been mixed about the effect of the yuan exchange rate. In June, the response to the renewed weakness in the yuan was overwhelmingly negative, with the Effect of Yuan Exchange Rate down 6% to 45.3.
“June’s pickup in business sentiment could be a sign that the more expansive policies adopted by the authorities since the beginning of the year are starting to feed through more prominently. Still, confidence over Q2 as a whole was only slightly higher than in Q1, with activity still at a historically low level”, said Philip Uglow, Chief Economist of MNI Indicators.
