China's manufacturing sector continues to contract, heightening growth concerns

China's factory activity declined for the third consecutive month in June, accompanied by a deepening weakness in other sectors, according to official surveys cited by Reuters released on Friday. These developments have added pressure on Chinese authorities to take additional measures to bolster economic growth as both domestic and international demand falter.

Although China's economy had surpassed expectations with faster-than-anticipated growth in the first quarter, driven mainly by a post-COVID rebound in consumption, policymakers have struggled to maintain this momentum in the second quarter. The National Bureau of Statistics reported that the services sector, which has been a key driver of growth, also experienced its weakest reading since China lifted its strict COVID-related restrictions in late 2020.

A Stumbling Economy

Add WION as a Preferred Source

The official manufacturing purchasing managers' index (PMI) inched up to 49.0 in June from May's 48.8, remaining below the 50-point mark that indicates expansion and is in line with predictions. Conversely, the non-manufacturing PMI declined to 53.2 from May's 54.50, signaling a slowdown in service sector activity and construction.

Reuters cited Rob Carnell, the regional head of research Asia-Pacific at ING, who highlighted that domestic tourism and dining out had initially helped to compensate for lost time earlier in the year. However, he emphasized that such activities can only sustain growth for a limited period. Retail sales indicators also indicate that they remain above historical trends but suggest a moderation in the second half of the year.

The separate services index from the National Bureau of Statistics fell to 52.8 in June from May's 53.8, reaching its lowest level since December when China eased its COVID restrictions. The release of these figures initially led to a decline in the yuan's value, reaching a seven-month low, and the Australian dollar, which hit a three-week low. However, both currencies later recovered from their losses.

Reuters cited Julian Evans-Pritchard, the head of China economics at Capital Economics, who noted that after a brief boost from the reopening, the service sector seems to be settling into a new normal of slower growth in the post-pandemic period.

Recovery Anticipation and Reality

Economists had initially anticipated that China's economy would recover quickly and become a significant driver of global growth after the abandonment of COVID controls. However, analysts are now downgrading their forecasts for the remainder of the year. Nomura, in particular, has been the most bearish, revising its growth forecast for China's gross domestic product (GDP) this year to 5.1 per cent from 5.5 per cent. This downgrade accounts for the potential impact of new stimulus measures. The PMI data indicated that new export orders have contracted for the third consecutive month.

Reuters cited Bruce Pang, the chief economist, and head of research for Greater China at Jones Lang LaSalle, who highlighted the imbalances and weaknesses reflected in the June PMI, including the continuous contraction of both domestic and external demand, an accelerated slowdown in the operations of small enterprises, and mounting pressure on the private economy. Pang emphasized the urgent need for a more substantial package of policy measures to achieve annual growth targets.

China's Economic Recovery Pledge

The Chinese government has set a modest GDP growth target of around 5 per cent for this year after falling short of its 2022 goal. This month, China's cabinet pledged to promote a sustained economic recovery 'in a timely manner.' While addressing the World Economic Forum summit in Tianjin, Premier Li Qiang reiterated Beijing's commitment to boost demand but did not announce any specific policies.

China has already reduced key lending benchmark rates this month to support economic activity. Although sources involved in policy discussions have indicated that China will implement additional stimulus measures, concerns about debt and capital flight may limit the scope of these measures to primarily address weak demand in the consumer and private sectors.

According to ING's Rob Carnell, cited by Reuters, he expects the government to provide some support but anticipates that it will be in the form of smaller, targeted measures rather than a large-scale financial stimulus. He stated that these measures may not substantially impact GDP growth.

(With Inputs from Reuters)