Update: China July factory growth unexpectedly stalls

[BEIJING] Growth at China's big manufacturing companies unexpectedly stalled in July as demand at home and abroad weakened, an official survey showed on Saturday, reinforcing views that the economy needs more stimulus as it faces fresh risks from a stock market slump.

The official Purchasing Managers' Index (PMI) stood at 50.0 in July, compared to the previous month's 50.2. The 50-point mark separates growth from contraction on a monthly basis.

Analysts polled by Reuters had predicted another tepid reading of 50.2, pointing to expansion, albeit a sluggish one.

However, both export and domestic orders shrank for the large firms covered by the survey.

It did not mention any impact from a savage 30 per cent drop in China's share markets since mid-June, though analysts said the wild price swings could hit consumer and business confidence and investment decisions, adding pressure on the already cooling economy. "It warrants more concrete policy measures to stabilise the real economy. Perhaps the funds used to prop up the share market could be used to support the real economy," ANZ economists Li-Gang Liu and Louis Lam said in a research note.

ANZ maintained its forecast that the central bank will cut interest rates by another 25 basis points (bps) this quarter and reduce banks' reserve requirements by 50 bps by year-end.

The government has rolled out a flurry of steps since last year to try to put a floor beneath sputtering economic growth, including accelerating infrastructure spending and repeated reductions in interest rates and banks' reserve ratio. But growth is still expected to moderate this year to around 7 per cent, the slowest in a quarter of a century.

Volkswagen lowered its global sales forecast on Wednesday and said it was braced for stagnant volumes in China, after years of double-digit growth in its biggest market.

A similar survey suggested strength in the services sector continued to offset some of the persistent weakness at factories, but there were worrying signs on that front, too.

The official non-manufacturing Purchasing Managers' Index (PMI) edged up to 53.9 in July, compared with the previous month's reading of 53.8 and pointing to solid expansion.

But services companies also reported softer orders, with the new orders sub-index falling to 50.1 in July from 51.3 in June, and firms cut jobs at a slightly faster pace. The employment sub-index inched down to 49.2 from June's 49.7.

The services sector has accounted for the bigger part of China's economic output for at least two years, with its share rising to 48.2 per cent last year, compared with the 42.6 per cent contribution from manufacturing and construction.

China's Politburo has promised to step up "targeted" adjustments to economic policy to foster stable growth in the world's second-largest economy, media said on Thursday.

In a rare acknowledgement of the challenges ahead, state radio quoted the decision-making body of the Communist Party as saying that China had yet to find new drivers to power its economy at a time when old engines are flagging.

REUTERS