China’s factory activity shrank more than initially estimated last month, contracting the most in two years as new orders fell and dashing hopes that the world’s second-largest economy might be steadying, a private survey showed yesterday.
The report followed a downbeat official survey on Saturday, which showed growth at manufacturing firms unexpectedly stalled, reinforcing views that the struggling economy needs more stimulus, even as it faces fresh risks from a stock market slump.
Fears of a full-blown market crash have added a new sense of urgency for policymakers in Beijing, with many analysts expecting more support measures to be rolled out within weeks.
The private Caixin/Markit China Manufacturing Purchasing Managers’ Index (PMI) dropped to 47.8 last month, the lowest since July 2013, from 49.4 in June.
That was worse than a preliminary reading of 48.2 and marked the fifth straight month of contraction.
New orders contracted after growing in June, while factory output shrank for the third consecutive month to hit a trough of 47.1, a level not seen in more than three-and-a-half years.
Yet, some economists warned against reading too much into last month’s gloomy data, arguing that the factory weakness might be transitory.
For one, summer storms in the Chinese manufacturing hubs of Zhejiang and Guangdong might have dented output, they said.
And while companies that had invested in the stock market were shaken by the rout, history has shown that falling share prices do not affect real spending in China, they said.
“When stocks were rising rapidly, consumption did not pick up,” Capital Economics Ltd’s Julian Evans-Pritchard said, citing China’s recent equity rally and a downturn in 2007-2008.
Instead, China’s retail spending grew faster after share prices slumped in 2007-2008, he said.
“The wealth effect is not evident in China,” he added.
While soft global demand could continue to weigh on China’s exports, market watchers believe increased government infrastructure spending and further policy easing should support domestic consumption in coming months, ensuring the economy meets the government’s 7 percent growth target for the year.
Still, the factory outlook looks sluggish at best.
The official factory PMI was also weaker than expected, falling to 50 last month from June’s tepid growth reading of 50.2. The official survey focuses more on larger firms, which are likely to benefit more from big infrastructure projects than smaller companies.
While growth in the services sector picked up slightly, offsetting some of the drag from persistent factory weakness, services companies rang alarm bells as well, reporting that new orders were cooling and they were cutting jobs at a faster pace.
Even some within the Chinese government are less upbeat about the economic outlook.
People’s Bank of China statistics division director Sheng Songcheng (盛松成) said that downward pressure on the economy would persist in the second half of the year, adding that growth in exports and investment is not likely to pick up.
His guarded view resonates with some companies as well.
China Glass Holdings Ltd on Friday became the latest in a growing list of firms to issue profit warnings due to weak demand, saying it expected a first-half loss.
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