China’s official manufacturing purchasing managers index was unchanged at 50.4 in September compared with August, the National Bureau of Statistics reported Saturday. The gauge has remained above 50, which separates expansion from contraction, for six out of the past seven months. The September reading matched a median forecast of 50.4 by 11 economists polled by The Wall Street Journal.
Subindexes gave mixed readings. One measured new orders weakening, while another for production showed improvement; both remained above 50. The official nonmanufacturing PMI edged up to 53.7 in September from 53.5 in August.
Economists said stepped-up bank lending and spending on government projects is helping to steady an economy that got off to a wobbly start to the year and has been slowing overall in recent years.
“You’re seeing a bit of a credit-fueled holding pattern,” said Angus Nicholson, an analyst with IG Markets Ltd. “The question is: when does that turn around and when are they going to cut credit? It’s very clear that this sort of continued funding of industrial overcapacity sectors is unsustainable.”
The pickup in activity is occurring in sectors that powered China’s economic boom but in recent years have dragged on growth: real estate, infrastructure and industry. In August, industrial profits rose 19.5% year on year, their best showing in nearly two years.
The government is helping to sustain the burst with spending on public projects. In September alone, projects worth more than 1 trillion yuan ($149.25 billion) were launched, according to the official Xinhua News Agency.
The credit-fueled momentum is expected to be enough to see China reach its 2016 gross domestic product growth target of at least 6.5%, still the slowest pace in a quarter-century, economists said. But, they said, it is coming at the cost of delaying needed restructuring, worsening overbuilding and excess capacity.
Smaller private companies remain reluctant to borrow and increase investment, which has fallen sharply this year.
“Considering the outlook, I’m not planning to invest anything in the business anytime soon,” said Chen Wenfeng, manager of Shengluo Trading Co., a shoe maker based in the southern city of Guangzhou. Mr. Chen said sales are down about 20% from a year earlier. “I’m not trying to get a loan from the bank, even if they would lend to me,” he said.
In real estate, homebuying has bounced back so strongly that the government is worried about bubbles in major cities. Beijing is the latest city to try to cool the market by announcing higher down-payment requirements on Friday night. Even so, many smaller cities remain ringed by half-finished apartment towers and are mired in property slumps.
Manufacturing, while reviving, is also feeding into the persistent problem of excess production as steel and coal producers bring idled capacity back on line. “The task of reducing excess capacity remains challenging,” said Zhao Qinghe, an economist with the statistics bureau. “The manufacturing sector’s stabilization is not on a firm footing yet.”
Economists said sustaining the momentum will become more difficult as it gets harder to wring growth out of the economy’s few drivers. The property sector is expected to decelerate, in keeping with its usual cyclical pattern. Corporate debt levels are high and infrastructure spending is already suffering from diminishing returns.
“This is only a small cyclical improvement. For next year, it’s going to get much more difficult,” said HSBC economist Ma Xiaoping. “It will become more and more costly to keep stimulating the economy in the traditional way.”