BEIJING: Activity in Chinese factories suffered its sharpest deterioration for four months in June, figures showed Friday, as weak demand and industrial overcapacity weighed on the world’s second-largest economy.
The figures are the latest to highlight a long-running growth slowdown in the country as the global outlook weakens.
The private Caixin Purchasing Mangers’ Index of manufacturing activity came in at 48.6 in June, down from 49.2 in May, the Chinese financial magazine said in a joint statement with data compiler Markit. It was also well off the median forecast of 49.2 in a Bloomberg News poll.
A reading above 50 signals expanding activity, while anything below indicates shrinkage.
Investors watch the figure closely as the first available indicator each month of the health of the economy.
Manufacturers shed jobs for the 32nd straight month, Caixin said, as they sought to cut costs in the face of a drop in new work.
Overall economic conditions in the second quarter were “considerably weaker” than in the first quarter, Caixin’s Zhong Zhengsheng said.
“Against the backdrop of a turbulent external environment, and in order to avert a sharp economic decline, the government must strengthen its proactive fiscal policy while continuing to follow prudent monetary policy.”
China is a vital driver of global expansion, but its economy grew only 6.9 percent last year, its weakest rate in a quarter of a century.
The key manufacturing sector has been struggling for months in the face of sagging global demand for Chinese products and excess industrial capacity left over from the country’s infrastructure boom.
But the official Purchasing Manager’s Index (PMI)—which focuses on larger firms than the Caixin survey—painted a slightly more positive picture, with data for June coming in at the breakeven point of 50.0, according to the National Bureau of Statistics (NBS).
The figure was slightly down from the previous two months, but matched economists’ median expectations of 50.0 in a survey by Bloomberg News.
1”It is noteworthy that the current domestic market demand remained weak and real economy momentum was still insufficient,” Zhao Qinge, analyst for the National Bureau of Statistics, said in a note.
“Due to the impact of slumping global economic growth, US interest rate expectations, US and European trade protection measures, and Brexit, recently the manufacturing trend has been weak.”
Some traditional industries dropped significantly, the NBS said, as the index for activity in highly energy-intensive factories fell 0.9 points to 48.2.
Larger firms, which tend to be state-owned, showed increased activity with a June PMI of 51.0, while activity in medium- and small-scale firms contracted, the NBS said.
The data suggested China was “unlikely” to achieve growth of 6.7 percent in the second quarter and the government would support growth with spending, analysts with ANZ said in a note.
“Brexit presents a new risk to China’s external demand and challenges China’s manufacturing sector in H2 2016. To react, we believe that the government will stimulate the economy by hastening infrastructure investment and urbanization.”
While manufacturing disappointed, China’s growing non-manufacturing sector showed health, Julian Evans-Pritchard of Capital Economics said in a note, pointing to a pick-up in the construction sector fuelled by state spending and property demand.
“Conditions in manufacturing appear to have deteriorated but the rest of the economy, which is less reliant on foreign demand, appears to be doing better.”
Beijing has said it wants to reorient the economy away from relying on debt-fuelled investment spending to boost growth and towards a consumer-driven model, but the transition has proven challenging.
Investors shrugged at the results, with Shanghai stocks up slightly by the break.