Factory activity recovers in July

Tax, fee and reserve requirement ratio cuts to ease burden on companies

The official purchasing managers' index for China's manufacturing sector stood at 49.7 in July, up from 49.4 in June, signaling a recovery in activities as it was the first month-on-month rebound in four months, the National Bureau of Statistics said on Wednesday.

The sub index for production gained 0.8 points to 52.1 in July while the index for new orders rebounded by 0.2 points to 49.8, according to the NBS. A reading above 50 indicates expansion, while a reading below that reflects contraction.

Among the 21 industries surveyed, 12 sectors including information technology, healthcare and mechanical and electrical equipment were in the expansion zone, up from nine in June.

Corporate sentiment is also improving as a sub-reading for business expectations rose to 53.6 in July.

NBS senior statistician Zhao Qinghe said that the data showed that production expansion is accelerating and market demand is improving.

"Policies including tax and fee cuts and the targeted reduction of reserve requirement ratio have helped ease the burden on companies and stabilize their confidence," Zhao said.

China's top leadership decided at a key meeting on Tuesday that the country will make the fiscal policy more effective and "keep liquidity reasonably ample" to maintain stable growth in the second half of the year.

The financial supply-side structural reform will be advanced and financial institutions should be encouraged to increase medium and long-term financing to the manufacturing industry and private companies. Targeted measures will also be taken to support the development of private enterprises, according to a statement released after the meeting.

Steven Zhang, chief economist with Morgan Stanley Huaxin Securities Co Ltd, said that the cooling trade tension between China and the United States and the effectiveness of domestic policies such as tax and fee cuts has lead to the rebound of manufacturing activities in July.

But he warned that the sub index for new orders stood below 50, remaining in the contraction area, meaning that demand in the manufacturing sector still faces the risk of further weakening.

"What is worth mentioning is that global trade is decelerating ... Given that the growth momentum remains relatively weak, monetary easing is not enough to boost growth and corporate confidence," Zhang said. "Whether China and the US could make progress in the trade talks is one of the key factors that could affect corporate sentiment. It is also necessary for China to unleash the potential of internal growth drivers."

The meeting of China's top leadership on Tuesday also vowed to carry out reforms to expand consumption, adopt more measures to stabilize manufacturing investment and to support private businesses by increasing medium and long-term financing for them.

Jiang Chao, an analyst at Haitong Securities Co Ltd, said in a research note that the key to stimulating private economy includes expanding direct financing for them, reducing tax and fee burden and improving market environment through further deregulation.