China factory conditions may deteriorate further on weak exports

Source: ICIS News

2018/07/03

SINGAPORE (ICIS)--China’s manufacturing conditions will likely deteriorate further in the coming months amid weakening exports, while the government’s recent measure to boost domestic consumption may take some time before taking root, according to analysts.

Manufacturing activities in Chinese industries eased in June, with the country’s official June purchasing managers’ index (PMI) falling to 51.5 points from 51.9 in May. Export orders posted a lower reading of 49.8, indicating a contraction.

The PMI is a barometer of an economy's manufacturing performance, with a reading of 50 and above indicating expansion.

Chinese media group Caixin reported its China general manufacturing PMI for June at 51.0, down from 51.1 in May.

“Overall, the [Caixin] manufacturing PMI survey pointed to strengthening price pressures in June. Deteriorating exports and weak employment, along with companies' destocking and poor capital turnover, put pressure on the manufacturing sector,” said Zhengsheng Zhong, director for macroeconomic analysis at research firm CEBM Group.

By category, the Caixin manufacturing output sub-index rose by 0.3 points to 52.1 in June. However, for the second quarter as a whole, the sub-index fell to 51.9 from 52.2 in the first quarter, suggesting a weakening in production momentum, Japan's Nomura Global Markets Research said in a note.

The new orders sub-index moderated to 51.7 in June from 51.8 in May and the new export orders sub-index fell to 48.8 in June from 49.2 in May, “suggesting downside pressure is stronger on external demand than it is on domestic demand”, Nomura said.

The index for new export orders in June was the lowest so far this year.

This points to a “grim export situation amid escalating trade disputes between China and the US, which led to weak demand across the manufacturing sector”, CEBM Group’s Zhong said.

An all-out trade war between the US and China could shave off the two economies’ output by 0.25%, Singapore’s DBS Group Research said, citing that the projection is based on a 10-25% tariff on all products traded between the world’s economic giants.

“Considering that China [economy] grows at 6-7% and the US at 2-3%, we believe the damage would be greater to the US than on China,” DBS said.

Nomura, meanwhile, said that the Chinese economy has yet to bottom out, and things will more likely get worse in coming months.

“Faced with both internal and external challenges, we expect the government to introduce more policy easing measures and take a more gradual approach in deleveraging,” it added.

The Chinese government has been introducing modest moves to ease its monetary policy amid signs that the economy is slowing down, while the yuan is slumping against the US dollar.

The People’s Bank of China’s (PBoC) last month decided to cut the banks’ reserve requirement, or the portion of deposit that must be held as reserves, by 50 basis points effective 5 July.

($1 = CNY6.67)

Interactive and Focus article by Nurluqman Suratman

Picture: Smoke billows from chimneys at a chemical factory in Tianjin, China. (Source: VIEW CHINA PHOTO/REX/Shutterstock)