Chinese factory slowdown fuels speculation over stimulus

With an official survey indicating that factory activity is at a four-month-low, particularly affecting smaller firms, onlookers believe China's government may engage in further stimulus to help prop up the country's fragile economy.

Photo by: Reuters
Photo by: Reuters

A stack of 100 yuan banknotes seen on a counter of a branch of a commercial bank in Beijing, China, March 30, 2016.

Growth in China's manufacturing sector stalled in June, an official survey showed on Friday, adding to expectations that Beijing will have to roll out more stimulus soon to boost the sluggish economy.

The official Purchasing Managers' Index (PMI) eased to 50.0 in June, compared with 50.1 in May and right at the 50-point mark that separates growth from contraction on a monthly basis.

Analysts polled by Reuters had predicted the reading would dip to 50.0, a four-month low.

Though output edged up to 52.5 from 52.3 in May, new export orders contracted, albeit marginally. Total new orders hovered just inside expansionary territory.

Manufacturers continued to cut jobs and at a faster pace, with the employment sub-index falling to 47.9, compared to 48.2 in May. Job losses could be rising as the government has pledged broad capacity cuts across a range of industries.A sub-index for smaller firms fell, while performance at larger companies improved, a sign that the government continues to lean on big state firms for growth.

After economic growth fell to a 25-year low in 2015, China unleashed a record credit expansion in the first quarter. That boost, along with a stronger housing market and a rebound in commodity prices, helped stabilise activity in March and April.

May data, however, have suggested a loss of momentum, and economists worry that if policymakers hold off on additional stimulus the economy will decelerate further in the second half of the year.

An employee works at a steel factory in Dalian, Liaoning Province, China, June 27, 2016. Picture taken June 27, 2016. (Reuters)

Recent data showed profits at industrial companies grew at a slower pace in May, and state firms' profits fell at a faster rate, reinforcing the view that conditions are deteriorating.

The outlook for Chinese exporters has been clouded further by Britain's vote last week to exit the European Union, which Premier Li Keqiang said "increased uncertainties in the global economy."

The Brexit vote has led at least two investment banks to lower their forecasts for China's 2016 growth. Nomura trimmed its forecast to 6.0 percent from 6.2 percent and Bank of America Merrill Lynch cut its view to 6.4 percent from 6.6 percent.

Any further deterioration in second-quarter performance might prompt policymakers to ramp up fiscal spending even further and loosen monetary policy again, analysts say.

A similar survey showed activity in China's services sector expanded at a faster pace, with the official reading at 53.7 in June from 53.1 in May.

A measure of the construction industry rose significantly as the government goes on an infrastructure spending free, while financial services and property sectors contracted as those markets begin to cool following strong activity earlier in the year.

Beijing has been counting on a strong services sector to pick up the slack as it tries to shift the economy away from a dependence on heavy industry and manufacturing exports.

China will release June economic data in coming weeks and second-quarter GDP on July 15.