China Manufacturing Gauge Strengthens on Growing Global Demand -- Update

A gauge of China's manufacturing activity jumped unexpectedly in June on improved demand, leaving more room for Beijing to continue its crackdown on financial risks without causing instability.

China's official manufacturing purchasing managers index increased to 51.7 from 51.2 in May, according to data released by the National Bureau of Statistics on Friday. The June reading, the second-highest of the year, beat a median forecast of 51.1 by economists polled by The Wall Street Journal. The index has now remained above the 50 mark that separates expansion from contraction for 11 straight months.

"The expansion of manufacturing activity has accelerated," said Zhao Qinghe, an economist with the statistics bureau. "Both domestic and overseas demand has been recovering."

A pickup in the broader economy was also reflected in the rise of the nonmanufacturing PMI, a measure of activity outside the factory gates. The index rose to 54.9 in June from 54.5 in May, thanks to improved conditions in the construction and services sectors.

"The better-than-expected PMIs will give the government more leeway to continue the so-called regulatory storm for the rest of the year as Beijing has won some success in striking a balance between maintaining economic growth and cracking down on financial risks," said Zhang Fan, an economist with RHB Research.

In responses to Chinese President Xi Jinping's call for financial stability ahead of a major power shuffle later this year, Chinese regulators unleashed a blizzard of new directives aimed at reining in soaring borrowing levels, with the central bank increasing a series of money-market interest rates.

The moves indicate the government's resolve in tackling snowballing debt long watched as a potential threat to the stability of the world's second-largest economy. The worries over China's debt levels prompted Moody's Investors Service last month to downgrade China's sovereign credit rating for the first time in nearly three decades.

Beijing is still likely to meet its annual growth target of 6.5% after strong growth of 6.9% in the first quarter, but the momentum will inevitably lose some steam in the months ahead amid the regulatory crackdown, said RHB economist Zhang Fan.

More than 40% of manufacturers surveyed by the statistics bureau have said for four months in a row that they have difficulty getting funding to support their productions and investment, said Mr. Zhao, the economist with the bureau. He also called for more support from the country's financial institutions.

"We suspect that the current resilience of growth will prove temporary. With tight monetary conditions weighing on credit growth, it will be difficult to avoid a renewed slowdown in growth later this year," said Julian Evans-Pritchard, an economist with Capital Economics.

Grace Zhu

(END) Dow Jones Newswires

June 30, 2017 00:42 ET (04:42 GMT)