July 1, 2015 / 6:18 AM / 2 years ago

China and Japan show hints of healing, rest of Asia still struggling

5 Min Read

Pedestrians cast their shadows on a wall at a construction site in Beijing in this December 12, 2014 file photo.Kim Kyung-Hoon/Files

SYDNEY (Reuters) - Growth in China's services sector picked up in June while big Japanese companies planned to ramp up spending at the fastest pace in a decade, offering hope that prospects are improving for Asia's largest economies despite sluggish factory growth.

Wednesday's data fueled expectations that the wobbly global economy may start leveling out in the second half of the year, but the outlook remains murky, with fears that Greece's debt crisis could splinter the euro zone and worries about whether China can avoid a stock market crash keeping investors on edge.

Activity in China's factory sector expanded slightly in June though not as much as expected, official surveys showed, suggesting the economy may be starting to slowly level out after a raft of support measures including interest rate cuts and more infrastructure spending.

Japanese factories barely expanded but a private report showed a strong pick-up in export orders, while a Bank of Japan survey showed a strong bounce in business confidence and spending plans, a welcome sign for premier Shinzo Abe's economic revival strategy which has seen limited success in nudging firms to boost wages and investment.

"When you have two of the biggest economies in the world showing positive readings, that is encouraging. They also come on the back of some good readings out of the United States," said Craig James, chief economist at CommSec in Sydney.

Yet reports from South Korea, Taiwan and Indonesia provided a more sobering read that still pointed to challenging conditions for many economies in the region.

The unending uncertainty over Greece also dampened confidence, though Asian markets held up well on Wednesday.

Similar activity surveys are due from Europe and the United States later in the day.

Though Greece makes up only about 2 percent of the euro zone economy, fears of contagion to other weak EU members could overshadow recent signs that businesses are in better shape.

In the U.S., the ISM factory PMI is expected to accelerate, reinforcing views the Federal Reserve could start raising interest rates in September, though a healthier U.S. economy is not giving as big a boost to Asia's exports as in the past.

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To be sure, Asian exporters and global policymakers have made the same bad calls over and over again in past years, betting that advanced economies will recover strongly, but sustained turnarounds have repeatedly proved elusive.

China's official manufacturing Purchasing Managers Index (PMI) for June came in at 50.2, unchanged from May, while the services PMI climbed to 53.8 from 53.2 in May, above the 50 level that is supposed to separate growth from contraction.

"It basically highlights there is some degree of stabilization happening and it's very much in line with what the authorities want to see," CommSec's James added.

Analysts at ANZ, though, suspect softness in the manufacturing sector would require more policy easing.

"Looking ahead, as real interest rates faced by Chinese companies remain elevated, we see that further monetary easing is still highly needed," Liu Li-Gang and Zhou Hao at ANZ wrote in a research note.

On Saturday, China's central bank cut lending rates for the fourth time since November and trimmed the amount of cash that some banks must hold as reserves. The dual central bank action was the first since the height of the global financial crisis in late 2008.

In contrast, conditions in export-reliant South Korea continued to deteriorate, with exports falling for a sixth straight month in June and manufacturing activity shrinking at the fastest pace in nearly three years.

Adding to the country's woeful performance is the outbreak of the deadly Middle East Respiratory Syndrome since late May, which has prompted some analysts to trim their economic growth forecast for the year and pushed the government to announce a $13 billion fiscal stimulus package last week.

Analysts at Barclays were more upbeat.

"We see some silver linings that could pave the way for Korean exports to stabilize in Q3," they wrote in a note to clients, citing a strong rise in U.S. consumer confidence and signs that its shipments to China appeared to be bottoming.

Much might depend on whether China tames its volatile share market, which has plunged 20 percent from its peaks in early June, and whether its housing market can take a stronger turn in the second half of the year.

While home sales and prices have picked up in the biggest Chinese cities, investment remains weak with high local government debt levels and bureaucratic delays thwarting Beijing's efforts to get big infrastructure projects off the ground.

Additional reporting by Kevin Yao in BEIJING, Leika Kihara and Tetsushi Kajimoto in TOKYO, Christine Kim in SEOUL; Editing by Kim Coghill

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