China’s factory activity returns to growth as exports boom

China’s factory and non-manufacturing activity fared better than expected in June, as booming exports offset cooling growth in the domestic economy.

The official manufacturing purchasing managers’ index climbed to 50.3 after slipping in May to 50, the threshold separating expansion from contraction.

The measure of activity in construction and services unexpectedly rose slightly to 50.2, the Bureau of Statistics said Tuesday.

A subindex of overall orders rebounded to a three-month high in a sign of improvement for sales at home. The PMI for high-tech manufacturing was 53.5, “significantly higher” than the overall performance among factories, according to NBS statistician Huo Lihui.

That showed “the development of high-end manufacturing continued to improve and its leading role was further strengthened,” Huo said in a statement accompanying the data release.

The figures shed more light on how the economy ended the second quarter after a surprise pickup to start the year. Evidence so far suggested it was heading toward a sharp slowdown, with retail sales and investment falling at a pace unseen since the pandemic.

The yield on China’s 10-year government bonds edged up one basis point to 1.72% after the data release. The yuan was steady in onshore and offshore markets, leaving it on track in June for its first decline against the dollar in three months. It’s still the best-performing currency in Asia so far this year.

The June PMI release “should be viewed as a moderately positive surprise for markets,” according to Hao Zhou, chief economist at Guotai Junan Holdings.

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But with employment and inventories in manufacturing still slumping, “the report also shows that the recovery remains uneven,” Hao said. “These indicators suggest that although activity has improved, the expansion is not yet broad-based.”

A spurt in sales overseas this year is providing a cushion for China by shoring up industrial production. But without stronger demand at home, the economy still faces risks ahead despite tentative relief for global shipping and energy prices after the US-Iran deal to reopen the Strait of Hormuz.

A global investment supercycle in artificial intelligence is meanwhile driving up prices and demand for hardware made by the world’s manufacturing powerhouse. In May, China’s export prices jumped at their fastest rate in over three years, in a turnaround after a long streak of declines.

Adding to strains on the economy, the European Union is weighing fresh measures to counter a flood of exports from China. On Monday, the two economic powers agreed to set an October deadline to make progress on their disagreements, according to the bloc’s trade chief Maros Sefcovic, who spoke after talks in Brussels with Chinese Commerce Minister Wang Wentao.

As economic pressures persist, investors are looking to policymakers for signs of support. This week, China’s central bank set the interest rate on its new overnight liquidity tool at a level that was below expectations, Bloomberg reported Monday. Some analysts see the move as a de facto rate cut that could help lower market borrowing costs.