China’s manufacturing activity contracted for a third straight month in June, an official survey showed on Monday, despite Beijing’s stimulus efforts helping to stabilize certain aspects of the industrial sector.
The official purchasing managers’ index (PMI) improved slightly to 49.7 in June from 49.5 in May but stayed below the 50-benchmark separating expansion from contraction, according to data from the National Bureau of Statistics. That figure was in line with analysts’ forecasts in a Reuters poll.
The sub-index tracking production rose to 51, and the gauge tracking new orders ticked higher to 50.2, indicating improvement in industrial activity and demand, according to NBS senior statistician Qinghe Zhao.
Inventory and employment levels at factories, however, continued to decline, coming in at 48 and 47.9, respectively.
The non-manufacturing PMI, which includes services and construction, rose to 50.5 from 50.3 in May. The services sub-index slipped to 50.1 while that of construction accelerated to 52.8, as infrastructure projects continued to progress at a relatively fast pace.
Mainland China’s benchmark CSI 300 index jumped 0.22% following the data release.
“China’s economy regained some momentum, supported by a rebound in manufacturing and construction,” said Zichun Huang, China economist at Capital Economics. “But we remain cautious about the outlook, as weaker export growth and a fading fiscal tailwind is likely to slow activity in the second half of the year.”
The new export orders component of the manufacturing PMI improved significantly to 47.5 from 44.7 in the prior month. That could signal a rebound in demand from U.S. buyers following the trade truce reached by Beijing and Washington in mid-May, Huang said.
Chinese manufacturers have been grappling with a deepening price war amid a supply glut and sluggish consumer demand, exacerbated by higher U.S. tariffs that dwarfed its exports to the world’s largest consumption market.
The country’s shipments to the U.S. plunged 34.5% in May from a year ago and over 21% in April, as exporters pivoted to alternative markets to avoid an eye-watering triple-digit tariff that had kicked in briefly before it was rolled back mid-May.
Chinese Premier Li Qiang said in an address at a key economic forum in Tianjin last week that Beijing was stepping up efforts to boost domestic demand in what would make China a “consumption powerhouse.”
Consumer prices have been mired in deflation this year, falling 0.1% in May from a year earlier.
A gauge on the wholesale prices, or producer price index, saw the biggest drop since July 2023 in May, deepening a deflation that has imperiled the manufacturing sector for over two years. Chinese industrial firms’ profits plunged 9.1% in May, their sharpest drop in seven months.
Additional fiscal stimulus would be crucial for Beijing to boost consumer demand, Tommy Xie, head of Greater China Research at OCBC Bank, said on CNBC’s Squawk Box Monday. “We are going to see more vouchers to be given, more [consumer goods] trade-in program … hopefully more debt issuance in second half, which can transfer to the firepower by both local government and central governments.”
On Friday, China’s commerce ministry said Beijing had reached an agreement with Washington on further details of the existing trade framework, noting that China would review and approve eligible applications for export of controlled items, while the U.S. would correspondingly cancel a series of restrictive measures against China.
While the statement was viewed as an encouraging sign that the bilateral trade talks are progressing, economists cautioned that the lack of details had left much in doubt, including what criteria Beijing will use to evaluate the application for exporting rare earth magnets.
“It underscores how tough and detailed trade talks can be,” said Wendy Cutler, vice president at Asia Society Policy Institute, with the latest development signaling both sides are working to ensure the preliminary deal agreed upon in Geneva gets implemented “in good faith.”
In a separate statement over the weekend, the commerce ministry reiterated its opposition against other countries seeking tariff relief with the U.S. in any deal that would compromise China’s interests. “If such a situation occurs, China will not accept it and will take resolute countermeasures to safeguard its legitimate rights and interests,” the statement said.
A private survey on China’s manufacturing activity conducted by Caixin Media and S&P Global is due on Tuesday, which is expected to improve slightly to 49 in June from 48.3 in the previous month, according to a Reuters poll.
Source: CNBC