July 31, 2019 / 1:36 AM / 18 days ago

Trade war keeps China's factories in reverse gear for third month

BEIJING (Reuters) - China’s factory activity shrank for the third month in a row in July, an official survey showed, underlining the growing strains on the world’s second-biggest economy as the Sino-U.S. trade war hits business profits, confidence and investment.

FILE PHOTO: Women work on a production line manufacturing air conditioners, at a factory of an electrical engineering company in Huaibei, Anhui province, China May 30, 2019. REUTERS/Stringer

Wednesday’s weak manufacturing reading adds to global growth risks and explains why policymakers around the world have stepped up easing measures, with some others considering doing so soon, to counter the fallout from international trade frictions.

The Purchasing Managers’ Index (PMI) rose to 49.7 in July, from the previous month’s 49.4, China’s National Bureau of Statistics said on Wednesday, but remained below the 50-point mark that separates growth from contraction on a monthly basis. Analysts polled by Reuters had predicted a reading of 49.6.

Deteriorating global demand saw export orders shrinking for the 14th month, the survey showed, though the sub-index ticked up fractionally to 46.9 from June’s 46.3.

The contraction in total new orders also moderated slightly, while factory output offered one brighter note, with growth quickening this month.

The official gauge came on the second day of U.S. and Chinese trade negotiators’ meeting in Shanghai, their first in-person talks since a G20 truce last month, though expectations for progress remain low.

“We expect that this downward trend in manufacturing will continue in 2019 until the trade and technology negotiations make some progress,” said Iris Pang, ING’s Greater China economist.

In a row that has dragged on for more than a year, the world’s two largest economies have slapped billions of dollars of tariffs on each other’s imports, disrupting global supply chains and shaking financial markets. That has prompted central banks from South Korea to Australia to South Africa to cut rates, with the U.S. Federal Reserve also widely expected to ease later on Wednesday for the first time since the global financial crisis.

Sluggish demand at home and abroad has led to a months-long spell of depressed activity for China’s manufacturers, and a sharp U.S. tariff hike announced in May threatens to crush already-thin profit margins.

The survey also showed persistent decline in orders from domestic customers, and even though demand conditions improved slightly it still remained worryingly weak despite a raft of recent stimulus measures.

Some manufactures have cut this year’s sales target as clients delay purchase orders in a wait-and-see approach, while others have already relocated their production capacity to neighboring countries to avoid the tariff hit. All of this has seen Chinese factories continuing to shed jobs in July.

The pressure on the manufacturing sector and weakening profits have prompted analysts’ warnings of a further period of stress for China before growth is expected to stabilize or recover.

MORE STIMULUS

The survey also showed small and mid-sized manufacturers fared worse than last month, while activity in larger companies, many of which are state-controlled, jumped back to expansion territory in July. That suggests policymakers’ efforts to support the private sector are yet to bear fruit.

So far, Beijing has relied on a combination of fiscal stimulus and monetary easing to support an economy growing at its slowest pace in nearly 30 years, including hundreds of billions of dollars in infrastructure spending and tax cuts for companies.

But the economy has been slow to respond, and business confidence remains shaky, weighing on investment.

A separate official business survey showed activity in China’s services sector grew at its slowest pace in eight months in July, knocked by growing pressure on the broader economy from U.S. trade measures, with the official reading at 53.7 in July from 54.2 in June.

Services growth was partly dragged by a contraction in the property sector, while activity in the construction industry also slumped, indicating recent fiscal stimulus is yet to fully flow through to infrastructure investment.

Beijing has been counting on a strong services sector to pick up the slack left by faltering trade as it tries to shift the economy away from a dependence on heavy industry and manufacturing exports.

China’s top decision-making body of the ruling Communist Party said on Tuesday that government will step up efforts to boost demand and support the economy, but will not use the property market as a form of short-term stimulus.

“The Politburo meeting suggested government had no plans to loosen the real estate market. We expect property investment to slow in the second half of this year, and that would weigh on the construction sector,” said Liu Xuezhi, an analyst with Bank of Communications.

China observers have said that Beijing’s recent growth-boosting measures will take time to filter through to the broader economy, and many analysts are of the view that further stimulus is needed to prevent a deeper downturn and to help stabilize growth.

“With the headwinds to growth from U.S. tariffs, cooling global demand and tighter property controls likely to intensify, we continue to anticipate further monetary easing in the coming months,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

Reporting by Lusha Zhang and Ryan Woo; Editing by Shri Navaratnam

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