Growth of China's manufacturing sector slows in June
Beijing
GROWTH of China's vast manufacturing sector slowed in June amid weak domestic demand and a worsening trade spat with the United States that could see implementation of tariffs targeting billions of dollars worth of goods later this week.
The Caixin/Markit Purchasing Managers' Index edged down slightly last month to 51 from 51.1, figures on Monday showed. Meanwhile, the official version of the index that surveys larger state-owned firms and released over the weekend showed that the PMI fell to 51.5 in June from 51.9 in May.
"Deteriorating exports and weak employment, along with companies' destocking and poor capital turnover, put pressure on the manufacturing sector," Zhengsheng Zhong, director of Macroeconomic Analysis at CEBM Group, said in a note accompanying the Caixin survey.
Both sets of PMIs for last month as well as data published throughout June show that the Chinese economy is feeling the pinch from a crackdown on lending, anti-pollution measures and a looming trade war that could potentially hinder its export sector. Growth of credit growth, investment and retail sales all slowed last month with both property and car sales dropping.
"The latest PMI readings suggest that the economy lost some momentum last month. With credit growth still cooling and US tariffs imminent, we expect further weakness ahead. The declines appear to have more to do with cooling demand rather than current activity," said Julian Evans-Pritchard, economist for Capital Economics.
Later this week, both the US and China are expected to implement a set of import tariffs after several rounds of failed negotiation talks. The first batch of US tariffs will target US$34 billion worth of Chinese goods and come into effect on July 6, with total tariffs to hit US$450 billion worth of goods later this year.
A breakdown of the Caixin PMI index shows that new orders, purchases of input materials and employment all declined last month. The employment sub-index fell at its strongest pace in over a year.
Export orders of both sets of PMIs declined to below 50 for the first time since October 2016, as factories were hit by worsening global trade conditions.
The data shows that factories are destocking, with the raw materials and finished goods sub-indexes both remaining weak last month.
Last week, the central bank had to cut the reserve requirement ratio (RRR) for banks, allowing more cash to flow into economy after stocks registered their worst fall in nearly two years and the yuan slid against the US dollar. Investors are increasingly nervous about a possible slowdown of the Chinese economy after several years of deleveraging and pressure on banks to cut lending as well as rising political tensions with the United States.
"We see increasing signs of a slowdown and expect more easing measures. The 50 basis point cut to the RRR showed that the authorities are aware of the downside risks to the economy, and have already shifted their policy stance to more easing," said Nomura analysts in a note to clients. The investment bank expects the RRR to fall by another 100 basis points this year as the economy bottoms out.
The Chinese government is walking a tightrope as it is determined to restructure its economy to a more qualitative growth model led by domestic consumption all the while maintaining sufficient growth to generate enough jobs for its millions of factory workers.
The non-manufacturing PMI continued to perform well last month, edging up from 54.9 to 55 in the Caixin version of the PMI - a sign that restructuring is taking place. This was driven by a pick-up in the construction index, while the service sector index held steady.
Looking forward, analysts expect credit supply to rebound as the central bank continues to release pressure on banks.
READ MORE: Trade frictions disrupt global factory growth in June
