China Pumps More Cash Even As Recovery Gather Pace

By Glenn Dyer | More Articles by Glenn Dyer

The explanation for the emerging commodities boom was confirmed with the monthly update of China’s factory activity in November which showed the strongest growth in more than three years.

Manufacturing activity surged faster than forecast, while activity in the country’s service sector continued to expand at the fastest rate in several years.

But data on employment showed a continuing weakness and jobs remain a weak point, along with the rising number of bond defaults which saw a surprise cash injection into the country’s financial markets on Monday.

China’s official manufacturing Purchasing Manager’s Index rose to 52.1 in November from 51.4 in October.

The update from China’s National Bureau of Statistics showed the highest reading since September 2017. It was also higher than the 51.5 median forecast in a polls of economists.

This official survey concentrates on larger companies while the rival Markit/Caixin survey, out today, looks at small to medium companies.

Economists say the outcome suggests solid fourth-quarter growth for China, which analysts at Nomura reckon will hit an annual rate of 5.7%, from 4.9% in the third quarter.

If that’s the 4th quarter GDP number, then growth for the year will be around 2% – the weakest in decades but much better than the sharp contraction in the first half of the year.

The official survey showed a solid reading for exports at 51.5, up from 51.0 a month earlier.

Reuters said strong e-commerce shopping promotions last month also helped perk up activity. That helped the services sector survey to a 9th straight month of growth with a reading of 56.4, up from 56.2 in October thanks to solid consumer confidence and few COVID-19 infections.

The survey showed that railway and air transportation, telecommunication and satellite transmission services and the financial industry were among the best performing sectors in November.

A sub-index for construction showed a very strong reading of 60.5 in November, improving from 59.8 in October and further confirmation why demand for cement, steel (and iron ore), copper and other materials remains strong.

Reuters pointed out that yesterday’s NBS report again confirmed China’s labour market is still facing strains. Services firms cut employment levels at a faster rate last month, while factories slashed staff for the seventh straight month, although at a slower pace.

“The continued recovery reduces the need for further monetary easing, but any shift to tightening is also unlikely given continued labour market pressure,” said Erin Xin, Greater China economist at HSBC was quoted by Reuters.

But on the same day, the country’s central bank surprised with a decision to inject more liquidity into the financial system.

Reuters said traders and analysts viewed the move as an attempt to calm nerves rattled by a string of recent bond defaults.

Reuters said the People’s Bank of China (PBOC) injected 200 billion yuan ($US30.4 billion) through one-year medium-term lending facility (MLF) loans to financial institutions on Monday, it said in a statement.

The bank kept the rate on the loans unchanged from the previous such injection, at 2.95%.

The central bank indicated it would conduct another MLF operation on December 15 to roll over maturing loans for December.

No MLF loans are set to expire on Monday, so the injection was new money and design to keep the system steady. The PBOC injected 800 billion yuan ($US120 billion) in loans into the financial system on November 16.

Reuters said that yesterday’s loans were issued alongside 150 billion yuan injected via reverse repurchase operations. With 30 billion yuan of reverse repos maturing on Monday, that made for a net injection of 110 billion yuan on the day (or around $US16 billion).

“Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong, said that it followed from regulatory efforts to stabilise market expectations following a series of bond defaults, including a recent meeting of China’s Financial and Stability Development Committee (FSDC) that vowed “zero tolerance” for misconduct,” Reuters reported.

“(The PBOC) has to inject funds starting now to match increasing cash demand toward the year-end as the SOE defaults really had a huge impact on the market,” he added.

The Shanghai stock market rose 1% yesterday to be up more than 4% in November, to the bond defaults haven’t hurt investors sentiment.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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