China's Falling Inventories Hit Hopes for Economic Rebound

Fresh signs of falling inventories in China's factories are denting hopes that economic growth will rebound in the second quarter.

Data released in early May as well as comments from industry officials suggest companies are not rebuilding their stocks as they expect demand to fall. That indicates the economic juggernaut is unlikely to bounce in the near term, after its gross domestic product growth slowed to 7.7% on year in the first quarter from the preceding quarter's 7.9%.

In the details of China's official Purchasing Managers' Index -- a key gauge of manufacturing activity -- the sub-index indicating stocks of finished goods fell to 47.7 in April from 50.2 the previous month, while the sub-index measuring raw material stocks was at 47.5, unchanged from March. Both are below the 50-point level that separates expansion from contraction.

But while the overall view on the inventory front seems gloomy, there are spots of optimism.
Within the steel sector, Baosteel - which focuses on high-end products where demand is stronger -- said it had bulked up on raw materials. "Demand from autos, the ultra-high voltage grid, energy pipe network, and urban rail will remain strong this year," general manager Ma Guoqiang, told a news briefing on April 26.
An executive with Anhui Conch Cement Co., one of China's largest cement makers, said that restocking is likely in coming months. "The last round of destocking was basically done in April and the downstream demand is expected to rise as the peak season for construction is coming," she said, adding that cement prices were likely to rebound slightly.

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