By Sumit Vishe
BEIJING – China’s manufacturing sector experienced a contraction for the second consecutive month in June, while the services sector saw its slowest growth in five months, according to an official survey released on Sunday. This has fueled ongoing calls for further economic stimulus as the country grapples with its recovery.
The National Bureau of Statistics (NBS) reported a purchasing managers’ index (PMI) of 49.5 for June, unchanged from May. This figure falls below the 50-mark that separates growth from contraction and aligns with the median forecast from a Reuters poll.
“Actual industrial activity should be stronger than the data suggests, as our observation is that the official PMI fails to fully capture the current export momentum, which has been the major economic driver this year,” noted Xu Tianchen, senior economist at the Economist Intelligence Unit. However, Xu added that both external and domestic demand remain insufficient to fully utilize China’s manufacturing capacity, hindering a recovery in producer prices.
While a sub-index of production was above 50 in June, other indexes—including new orders, raw material stocks, employment, supplier delivery times, and new export orders—were all in contractionary territory, according to the NBS survey.
China’s exports exceeded forecasts in May, but analysts remain cautious about the sustainability of export sales due to escalating trade tensions between Beijing and Western economies. Additionally, a prolonged property crisis continues to weigh on domestic demand.
Consumer caution and a fleeting boost from the Labour Day holiday led to a decline in the non-manufacturing PMI, which covers services and construction, falling to 50.5 from 51.1 in May, marking its lowest level since December. The services PMI dropped to 50.2, a five-month low, while the construction PMI fell to 52.3, the weakest reading since July of the previous year.
Analysts anticipate more policy support measures from China in the near term, with a government commitment to increase fiscal stimulus aimed at boosting domestic consumption.
“The weak PMI figures naturally call for more supportive policies from the Chinese government. However, the room for monetary policy easing is limited for the time being, as the Chinese currency is under pressure,” said Hao Zhou, chief economist at Guotai Junan International. “Fiscal policy is likely to take the driving seat, suggesting that the central government will need to issue more debt in the foreseeable future to boost overall domestic demand.”
Despite various measures introduced since last October, high local-government debt and deflationary pressures continue to challenge recovery prospects, dampening expectations among investors and factory owners.
In an effort to address these issues, China’s central bank announced a relending program last month aimed at affordable housing, intended to accelerate sales of unsold housing stock and better match supply with demand.
Officials are under pressure to identify new growth drivers to reduce the economy’s dependence on the property sector. Premier Li Qiang, speaking at a World Economic Forum meeting, highlighted that the growth of new industries is supporting healthy economic development.
“Since the beginning of this year, China’s economy has maintained an upward trend and is expected to continue improving steadily over the second quarter,” Li said.
Economists and investors are now looking ahead to the Third Plenum, scheduled for July 15-18, where hundreds of China’s top Communist Party officials will convene in Beijing for this five-yearly meeting.
