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China's factory output for July continues to shrink

Deteriorating global demand sees export orders dropping for the 14th month amid continuing trade war

Beijing

CHINA'S factory activity shrank for the third month in a row in July, an official survey showed, underlining the growing strains on the world's second-biggest economy as the Sino-US trade war hits business profits, confidence and investment.

Wednesday's weak manufacturing reading adds to global growth risks and explains why policymakers around the world have stepped up easing measures, with others considering doing so soon, to counter the fallout from international trade frictions.

The Purchasing Managers' Index (PMI) rose to 49.7 in July, from the previous month's 49.4, China's National Bureau of Statistics said on Wednesday, but remained below the 50-point mark that separates growth from contraction on a monthly basis.

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Analysts polled by Reuters had predicted a reading of 49.6.

Deteriorating global demand saw export orders shrinking for the 14th month, the survey showed, though the sub-index ticked up fractionally to 46.9 from June's 46.3.

The contraction in total new orders also moderated slightly, while factory output offered one brighter note, with growth quickening this month.

The official gauge came on the second day of US and Chinese trade negotiators' meeting in Shanghai, their first in-person talks since a G-20 truce last month, though expectations for progress remain low.

"We expect that this downward trend in manufacturing will continue in 2019 until the trade and technology negotiations make some progress," said Iris Pang, ING's Greater China economist.

In a row that has dragged on for more than a year, the world's two largest economies have slapped billions of dollars in tariffs on each other's imports, disrupting global supply chains and rattling financial markets. That has prompted central banks from South Korea to Australia to South Africa to cut rates, with the US Federal Reserve also widely expected to ease later on Wednesday for the first time since the global financial crisis.

Sluggish demand at home and abroad has led to a months-long spell of depressed activity for China's manufacturers, and a sharp US tariff hike announced in May threatens to crush already-thin profit margins.

The survey also showed persistent decline in orders from domestic customers, and even though demand conditions improved slightly, they still remained worryingly weak despite a raft of recent stimulus measures.

Some manufacturers have cut this year's sales target as clients delay purchase orders in a wait-and-see approach, while others have already relocated their production capacity to neighbouring countries to avoid the tariff hit. All of this has seen Chinese factories continuing to shed jobs in July.

The pressure on the manufacturing sector and weakening profits have prompted analysts' warnings of a further period of stress for China before growth is expected to stabilise or recover.

The survey also showed small- and mid-sized manufacturers fared worse than they did last month, while activity in larger companies, many of which are state-controlled, jumped back to expansion territory in July. That suggests policymakers' efforts to support the private sector have yet to bear fruit.

So far, Beijing has relied on a combination of fiscal stimulus and monetary easing to support an economy growing at its slowest pace in nearly 30 years, including hundreds of billions of dollars in infrastructure spending and tax cuts for companies.

But the economy has been slow to respond, and business confidence remains shaky, weighing on investment.

A separate official business survey showed activity in China's services sector grew at its slowest pace in eight months in July, knocked by growing pressure on the broader economy from US trade measures, with the official reading at 53.7 in July from 54.2 in June.

Services growth was partly dragged by a contraction in the property sector, while activity in the construction industry also slumped, indicating recent fiscal stimulus has not fully flowed through to infrastructure investment. REUTERS