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China's factory outlook worsens as trade war heats up again

Chinese investors not too worried by the outlook as they expect Beijing to come to the rescue

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The outlook for China's manufacturing sector deteriorated more than expected in May, as weakness in the domestic economy combined with escalation in the trade standoff with the US.


THE outlook for China's manufacturing sector deteriorated more than expected in May, as weakness in the domestic economy combined with escalation in the trade standoff with the US.

The manufacturing purchasing managers' index dropped to 49.4, according to data released by the National Bureau of Statistics on Friday. That's worse than the 49.9 forecast in a Bloomberg survey of economists. The non-manufacturing gauge remained steady to 54.3. A reading below 50 signals contraction.

A double-dip in output this year for the world's second- largest economy is now increasingly likely, as President Xi Jinping's government faces difficulty at home and abroad. US President Donald Trump's widening of his tariff campaign to Mexico bodes ill for China's chances of rapprochement with the US any time soon, while the weakening yuan and jitters in the domestic financial system sap confidence.

Market voices on:

"One really worries what the data are going to look like into the second half as the global backdrop and the local economy both turn down together," said Michael Every, head of Asia financial markets research at Rabobank in Hong Kong.

A sub-index gauging new export orders fell further into contraction suggesting that exporters felt the squeeze of renewed tariff threats from the US and waning global demand. Weak factory sentiment implies that the apparent recovery in the first half has been short-lived amid a sudden escalation of the trade war. Policymakers may be forced to take bolder easing steps, although the weakening yuan is a constraint.

"The momentum of the economy is continuing with the softer trend we saw in April," Grace Ng, a China economist at JPMorgan Chase & Co in Hong Kong, said on Bloomberg Television. "Now on top of that, there is the complication from the escalation of tariffs from the US which will then drag on the export sector which will feed through to the domestic economy."

The deterioration in May was foreshadowed by Bloomberg's deck of early indicators which showed weakness in stocks, copper prices and lower confidence among small firms. The outlook worsened across all enterprise size categories, though by the most among small companies. The index there slumped to 47.8 from 49.8.

Chinese investors were not overly bothered by the deteriorating manufacturing outlook, mostly because they expect Beijing to come to the rescue.

Citic Securities Co and Bank of America Merrill Lynch have already flagged the possibility that China could cut the reserve requirement ratio (RRR) as liquidity tightens. The People's Bank of China added a net 430 billion yuan (S$86 billion) into the banking system this week, the most since mid-January. Those injections were seen as a response to market jitters resulting from the government's takeover of a Chinese lender - the first in 20 years.

Said China Construction Bank senior currency and rates strategist Stephen Chiu: "A targeted RRR cut is needed; it will probably be implemented in steps given the PBOC did one earlier in May."

Sentiment has also been dampened by the trade dispute with the US, which doesn't appear to be headed towards a resolution anytime soon.

That has sent the yuan towards its worst month since July, and the benchmark Shanghai Composite Index to a 5.8 per cent monthly drop. Foreign investors sold about 53.7 billion yuan of Chinese equities in May, smashing last month's record of 18 billion yuan.

Market watchers seem even more convinced after yesterday's data that policymakers will offer some kind of support. BLOOMBERG