BEIJING (Reuters) – China's manufacturing activity declined more than expected in June, showed an official manufacturing survey, highlighting the need for more economic stimulus, as US tariffs and domestic demand weaker have increased the pressure on new orders of goods.
Workers direct a crane that lifts steel pipes for export to a port in Lianyungang, Jiangsu Province, China, June 30, 2019. REUTERS / Traversa
The Purchasing Managers' Index (PMI) stood at 49.4 in June, the Chinese National Statistical Office said Sunday, unchanged from the previous month and below the limit of 50 points separates growth from contraction on a monthly basis. Analysts surveyed by Reuters have forecast a reading of 49.5.
The weak production readings are likely to cast a shadow over the obvious progress that US and Chinese leaders made at the G20 summit in Japan over the weekend to restart their troubled tariff debates amid an expensive trade war.
Furthermore, they will raise concerns about the stalled growth in China and the risk of a global recession, despite export data and industrial profits slightly better than expected in May.
Many economists still expect the economy to face strong headwinds in the coming months, while domestic demand falters and external risks increase.
"Even if the outcome of the G20 summit (in Osaka) could increase the confidence of some entities, organic growth in the economy is still insufficient and counter-cyclical stimulus policies must be maintained," the Huatai Securities researchers wrote in a research note on Sunday.
"The PMI index continued to lose ground this month and only the sub-index of the raw materials inventory rose due to weak demand," the research note reads.
In June, China's factory production growth slowed, with the sub-index falling to 51.3 from 51.7 in May while the contraction in total new orders increased to 49.6 from 49.8.
Export orders extended their decline with the sub-index falling to 46.3 from 46.5 in May, suggesting further weakening of global demand.
Import orders also worsened, reflecting the weakening of domestic demand despite a series of growth support measures launched at the beginning of this year.
Southwest Securities said the weak new export orders reflected a weakening of the front-loading effect, which temporarily boosted exports when Chinese companies rushed to place orders before rates increased.
Presidents Donald Trump and Xi Jinping held puzzle talks at the G20 summit on Saturday. However, Chinese state media have warned that Beijing and Washington will probably face a long road before the two countries can reach an agreement.
Nomura analysts expect that any gains made on a temporary trade agreement between China and the United States would prove fleeting with a new escalation probably in the future.
Trump has already imposed tariffs for $ 250 billion of Chinese assets and threatens to extend them to another $ 300 billion, which would effectively cover all Chinese exports to the United States. China has retaliated with tariffs on US imports.
To meet the economic challenges, policy makers have released a series of measures and are expected to be more. Premier Li Keqiang last week pledged to cut real interest rates on loans for small and micro-enterprises.
Goldman Sachs said that the lack of substantial progress in the Sino-US trade talks at the G20 over the weekend suggested that the stimulus, including cuts to the banks' mandatory reserves, would probably have been necessary.
"We expect greater policy easing (two more cuts in the 2H reserve ratio this year, more fiscal measures to support infrastructure investments) will come in the coming months," Goldman Sachs said in a statement.
Producers continued to cut jobs in June, with the employment sub-index falling to 46.9, compared with 47.0 in May, when it hit the lowest level seen since March 2009.
An official business survey showed that China's service sector activity remained stable in June, despite increasing pressure on the economy in general from US trade measures, with official reading at 54, 2 of June from 54.3 in May.
Beijing has relied on a strong service sector to recover while trying to shift the economy from a dependence on heavy industry and manufacturing exports.
Reporting by Yawen Chen, Yilei Sun and Norihiko Shirouzu; Written by Yawen Chen; Editing by Sam Holmes
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