China’s manufacturing activity weakened and new export orders slowed last month despite the improving U.S. economic outlook.
The China Federation of Logistics and Purchasing said its purchasing managers’ index fell to 50.1 in June from 50.8 in May, while the new orders sub-index and new export orders sub-indexes fell, respectively, to 50.4 and 47.7 last month, from 51.8 and 49.43 in May.
But although the CFLP PMI indicated a ninth consecutive month of overall growth since the index fell below 50 last September (a PMI reading greater than 50 indicates expansion, while a reading below 50 indicates contraction), a separate PMI by HSBC that focuses more on smaller private companies was more dispiriting for traders.
Its data revealed that manufacturing activity in the world’s second-largest economy fell to a nine-month low of 48.2 in June, down from 49.2 in May. New export orders also shrank to 44.9 from 48.9 as purchases from Europe and the U.S. sagged.
A shortage of credit was cited by manufacturers as another factor for the declines as regulators used monetary controls to dampen a lending boom threatening to spiral out of control. China's new administration headed by President Xi Jinping is also focusing on rebalancing the economy to reduce reliance on exports.
“As Beijing refrains from using stimulus, the ongoing growth slowdown is likely to continue in the coming months,” HSBC economist Hongbin Qu said.
IHS senior economist Xianfang Ren said China’s manufacturing sector was hanging on, but most of the risk was downside.
“A few sub-indicators of the (official) PMI have long indicated that the economy is in sharp distress — the buy-up price index collapsed in April and now is still bouncing below 45, and the purchased goods inventory has been under 50 for five straight months, a clear indication of stagnant activities,” he said.
“We believe the Chinese economy is far from out of the woods yet, before the four main challenges are resolved — destocking, deleveraging, reducing overcapacity and deflating the housing bubble.
“The process has just started, which means the economy could be in a hang-on mode for quite some time.”
HSBC has cut its forecast for GDP growth in China this year to 7.4 percent from 8.2 percent. Indeed, some analysts now expect economic output growth to fall below 7 percent in the second half of this year after slowing to 7.7 percent in Q12013, from 7.9 percent the previous quarter.
“We expect the official PMI to drop below 50 in July as policy tightening continues to affect the economy,” Nomura analyst Wendy Chen said. “The weak PMI reinforces our view that there is a 30 percent chance that GDP growth may drop below 7 percent in Q3 or Q4.”