China's Economic Growth Powered Mainly by Big Companies

The latest Purchasing Managers’ Index (PMI) data shows that China’s growth continues to be driven by large firms while small companies are struggling just to stay even.

Overall the August PMI suggests that China’s industrial growth is gaining steam, having risen to 51, the fastest rate of growth since April 2012. A PMI reading above 50 signals expansion. The PMI had been 50.3 in July and 50.1 in June, according to the China Federation of Logistics and Purchasing. August was the 12th consecutive month in which the PMI was above 50.

The recovery in growth is limited mainly to big companies, with small firms continuing to face difficult conditions, according to Zhu Haibin, chief economist for China at JPMorgan.

The PMI for large enterprises rose to 51.8 in August, up from 50.8 in July. For medium-sized enterprises the PMI was flat at 49.6 while the number for small firms fell by 0.2 points to 49.2.

Overall production rose to 52.6 in August, up from 52.4 in July. The most encouraging data was a 1.8-point jump in new orders to 52.4. Raw materials inventories rose to 48, compared with 47.6 in July.

Another clear indicator of accelerating economic activity was a 3.1-point gain in the input price index to 53.2 due to rebounding prices for onshore commodities on rising demand.

China’s economy appeared to be picking up steam in recent months. July data for trade, industrial production, fixed-asset investment, retail sales and foreign direct investment were all better than expected thanks in part to central government stimulus efforts. They included tax reductions for small companies, more investment in railway and other infrastructure construction and reduced red tape for exporters.

Until China’s small and mid-sized businesses also show signs of growth, the recovery in economic growth is likely to be shallow and fragile. China is currently trying to shift toward a more consumption-driven economic model. The rate of growth of small and mid-sized firm is a much better indicator of consumer confidence than that of the large, state-run companies.