October 2, 2017 / 9:26 AM / in 2 months

Asian factories rev up in September ahead of year-end spending spree

SINGAPORE (Reuters) - Factories in Asia’s largest economies cranked up activity in September as a synchronized upswing in growth globally pointed to solid consumption of manufactured goods heading into the lucrative end-of-year shopping season.

FILE PHOTO: A truck drives past rolls of steel inside the China Steel Corporation factory, in Kaohsiung, southern Taiwan August 26, 2016. REUTERS/Tyrone Siu/File Photo

However, pockets of weakness in regional economies are likely to keep Asian central banks slanted toward more accommodative monetary policy, even as their Western counterparts move to scale back stimulus.

China’s central bank on Saturday cut the amount of cash that some banks must hold as reserves for the first time since February 2016 in a bid to encourage more lending to struggling smaller firms and energize its lackluster private sector.

The world’s second-largest economy has defied expectations for a slowdown this year, growing at a strong clip in the first half thanks to a construction boom. Beijing’s latest easing comes ahead of a key party gathering this month.

“It’s a solid backdrop for manufacturing in the region as we head toward the big shopping season,” said Rob Carnell, Asia’s head of research at ING.

That sentiment was backed by an official Purchasing Managers’ Index from China’s vast manufacturing sector, which showed activity last month grew at the fastest clip since 2012 on solid demand.

But cost pressures from high raw materials prices and continued underperformance of smaller firms mean some manufacturers are still struggling, which was reflected in a separate private survey of Chinese factories showing growth slowed in September.

In Japan, factory activity grew the fastest in four months, thanks to robust exports growth and underpinned improving economic momentum even though inflation remained tepid. Meanwhile, a closely watched Bank of Japan survey showed big manufacturers have more confidence in business conditions than they have had for a decade, thanks to a weaker yen and robust global demand.

In South Korea, manufacturing activity expanded at the fastest pace in almost two years.

Indonesia, Southeast Asia’s biggest economy, also showed an improvement in factory growth but the pace was tepid and production contracted slightly. Indonesia has cut interest rates twice this year in a bid to boost stubbornly weak domestic consumption, while India slashed rates once in August to spur growth and inflation.

Those moves, along with the BOJ’s commitment to maintain its ultra-low rates for the foreseeable future, marked a contrast to the West’s shift toward tighter policy, although analysts expect the extent of stimulus in Asia to be measured.

“I would characterize some of the easings (in Asia) as a bit of fine-tuning really and not a major divergence in policy with the West,” ING’s Carnell said.

“The regional economies continue to grow at a decent pace.”

GLOBAL UPSWING

Indeed, a synchronized upswing in the global economy has been a boon to manufacturers from China to Britain and the United States, with export-reliant Asia enjoying a spurt in growth led by an upsurge in sales of electronics.

A raft of European PMIs scheduled for publication later on Monday are expected to paint a picture of robust manufacturing momentum globally.

Shipments from Japan and South Korea - two major exporters - remained robust with the boom helping their economies grow at a decent clip. In Taiwan, another export-bellwether, factories continued to expand at a steady pace on higher global demand.

In South Korea, higher memory chip and steel product sales lifted exports by 35 percent year-on-year in the longest stretch of expansion since 2011.

Full-year growth in China is widely expected to handily meet the government’s target of 6.5 percent, after stronger-than-forecast growth of 6.9 percent in the first half, driven by a year-long building boom and solid exports.

That augured well for Asia’s manufacturers for the rest of the year.

“Looking ahead, we expect conditions in the region’s manufacturing sectors to remain fairly healthy over the coming months, helped by a combination of loose domestic monetary policy as well as firmer global growth,” said Shilan Shah, economist at Capital Economics.

And given price pressures are largely contained in places like China and Japan as well as smaller economies including Singapore and Indonesia, policymakers will have headroom to boost stimulus if the need arises.

“The big picture is that inflation in most of these economies is set to stay benign, giving their central banks scope to keep interest rates low to support growth,” Shah said.

Editing by Sam Holmes

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