Asia June industries weaken; China poses strong downside risks

Source: ICIS News

2019/07/02

SINGAPORE (ICIS)--Asia’s manufacturing activity weakened in June as the US-China trade war continued to dampen business sentiment, with heightened downside risks from China’s economic slowdown, according to analysts.

Based on latest private surveys of manufacturers in China, Japan, South Korea, business conditions in June worsened as they all showed lower manufacturing purchasing managers’ index (PMI) readings from the previous month.

The three countries in northeast Asia posted contraction readings of below 50 for the month.

The PMI is a barometer of an economy’s manufacturing activity, with a reading of 50 and above indicating expansion, while a number below denotes contraction.

“Growth is slowing and we see rising downside risks, given Asia’s high exposure to worsening US-China trade frictions,” Japanese brokerage firm Nomura said in a note.

While the US and China have recently agreed to a tariff ceasefire and resume trade negotiations at the recent G20 summit, “there is significantly less optimism that the world’s two largest economies can paper their differences and rivalry to achieve a trade deal”,  Singapore-based DBS Bank in a research note.

“Having been ‘once bitten, twice shy’, businesses and consumers are likely to be cautious on spending, wary that talks can break down ending with more US tariffs of 10% or 25% on the remaining $325bn of Chinese goods,” it said.

China is scheduled to release its second-quarter GDP data on 15 July, with growth projected to slow from an annualized rate of 6.4% in Q1 2019, according to DBS.

The world’s second-biggest economy and Asia’s biggest reported an official June PMI of 49.4, unchanged from the previous month, indicating continued contraction.

Both production and new orders sub-indices fell in June, to 51.3 and 49.6, respectively; while the raw material inventory sub-index rose to 48.2.

The employment sub-index dipped further in June to 46.9, the lowest since March 2009, signaling strong headwinds on employment.

Large enterprises in China posted a PMI reading in the contractionary territory in June at 49.9, the lowest since September 2012; while small and medium-sized enterprises’ PMIs rose to 48.3 and 49.1, respectively.

Meanwhile, the Caixin China general manufacturing PMI for June dipped below the 50.0 threshold for the first time in four months at 49.4, as total new business and international sales declined at the end of the second quarter.

“China’s economy came under further pressure in June. Domestic demand shrank notably, foreign demand was still underpinned by front-loading exports, and business confidence fell sharply,” said Zhengsheng Zhong, director of macroeconomic analysis at China-based investment advisory firm CEBM Group.

Slumping demand in China is being felt across the rest of Asia, particularly in South KoreaSingapore, Taiwan and Indonesia, which have all experienced seven consecutive months of year-on-year contraction in exports, CrossASEAN Research chief economist Prasenjit Basu wrote in a note for investment research and analysis firm Smartkarma.

“With China unable to provide additional monetary stimulus to the economy, domestic demand is likely to remain weak, causing a trend contraction in China's imports. This will continue to exert negative pressure on Asia's trade-dependent economies,” he added.

Focus story and interactive by Nurluqman Suratman

Photo: Chinese Sinopec Qingdao Refining and Chemical's refinery in Shandong province, China (Source: Sipa Asia/Shutterstock)

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