Surveys Show Chinese Factories Facing Gloomy Outlook Risks

Two surveys this week show China’s manufacturing sector faces a new level of gloom as owners struggle with poor demand and risky growth in the second half of this year.

A private-sector survey of purchasing managers from 650 private and state-owned manufacturers published on Thursday found that operating conditions in the sector deteriorated for the first time in nine months as new orders tumbled.

The Caixin/S&P Global manufacturing Purchasing Managers’ Index (PMI) dropped to 49.8 in July – below the 50-mark separating growth from contraction – from 51.8 the previous month. That was the lowest reading since October last year and well off forecasts in a Reuters survey of 51.5.

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The unexpectedly downbeat survey, which mostly tracks export-oriented firms, came on the heels of an official PMI survey covering bigger companies that also showed reduced order flows and weak prices.

The Caixin survey attributed the PMI drop to the first fall in new orders in a year, with survey respondents blaming the decline on subdued demand and client budget reductions.

Sub-sector data indicated the drop in new orders predominantly affected investment and intermediate goods, while the consumer goods sector saw slight expansion in July.

Manufacturing sector could face ‘cruel summer’

The overall manufacturing sector could be entering a “cruel summer” after the official PMI data on Wednesday pointed to soft economic momentum in July, Citi Research said. Industrial production growth last month may have slowed to 4.8% year-on-year from 5.3% in June, and factory-gate prices may have extended their declines, it added.

“The most prominent issues are still insufficient effective domestic demand and weak market optimism,” said Wang Zhe, an economist at Caixin Insight Group, calling for policy efforts to stabilise growth.

Some manufacturers lowered selling prices to support sales amid increased competition, the survey showed.

Employment was stable as the rate of job losses was unchanged from June, staying in contractionary territory for 11 months.

The world’s second-largest economy missed growth forecasts in the second quarter and faces deflationary pressures, with retail sales and imports significantly underperforming industrial output and exports.

China’s ruling Communist Party has acknowledged the stiff headwinds buffeting the economy, saying domestic demand remains “insufficient”, and major sectors face risks and “dangers” as traditional growth drivers are being replaced by new ones, according to an official readout of a regular meeting by the party’s powerful Politburo this week.

To boost consumption, China announced last week that around 150 billion yuan ($20.74 billion) out of 1 trillion yuan ultra-long special treasury bonds issuance will subsidise replacements of old appliances, cars, electronic bicycles and other goods.

Despite the overall tepid new orders, export orders continued to increase in July, though the rate of growth slowed slightly from June, according to the Caixin survey.

China’s trade growth in the second half faces numerous obstacles, including high geopolitical risks, supply chain disruptions due to protectionism, shipping congestion and escalating shipping fees, Lv Daliang, customs spokesperson, said on Tuesday.