PMI edged up to 53.2 in June from 53.1 in May. After seasonal adjustment, the index rose from 52.7 to 53.7, the highest since last April (see chart next page). These results echoed stronger anecdotal data for electricity production and cargo traffic. Continued aggressive credit growth and stock and property value appreciation likely also helped firm up sentiment among producers.
The components still show a picture of caution, as the inventories index remains in contraction for the 14th straight month, while employment hung onto the breakeven 50, as firms are no longer have significant downsize pressure, but are not in a position to expand. Meanwhile, production accelerated while new orders moderated, though both still well in expansion territory.
New export orders rose from 50.1 to 51.4, while imports gained from 49.4 to 49.9. This provides some hope for trade in June and jives with the continued thawing in trade in Hong Kong and Singapore. Input prices are decidedly moving up, however, rising to 57.8, highest since last August. This partly reflects the June 1st hike in domestic fuel prices, and with the second, and bigger hike, July input prices are likely to rise again. These should help put a bottom on PPI readings this month or next.
The leadership has recognized further evidence of strengthening recovery. Governor Zhou of the PBOC said that the economy may reach or exceed the 8% growth target this year, while the banking regulator expressed his concern over excessive lending. These have so far not limited either lending or market sentiment. But stronger growth and clearly rising prices reinforce our view that monetary policy easing has ended and that a shift to neutral policy, first in the form of much slower new loan growth, should be close at hand.
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