China factory sector struggles, big firms fare better

By Aileen Wang and Kevin Yao

BEIJING (Reuters) - China's factory activity stayed weak in July as persistent pressure on the economy extended into the third quarter, although bigger firms fared better as the government moved to bolster growth, a pair of surveys showed on Thursday.

A small improvement in the official PMI offered some optimism for an economy that has slowed in nine of the past 10 quarters, but analysts cautioned against rushing to a conclusion the world's second-largest economy had arrested its decline.

The government has tried to allay concerns the economy has slowed more than expected as it pushes through reforms, recently announcing a series of targeted support measures and expressing confidence of meeting its 7.5 percent growth target this year.

"The government needs to do more to strengthen this momentum if you look at the official figure. There are still a lot of uncertainties in the economy," said Haibin Zhu, chief China economist at JPMorgan Chase in Hong Kong.

The official PMI, which focuses on big and state-owned firms, published by the National Bureau of Statistics, rose to 50.3 in July from 50.1 in June. Economists had expected it to fall to 49.9.

In contrast, the HSBC Purchasing Managers' Index (PMI), compiled by Markit Economics Research, showed activity shrank for a third straight month as it fell to an 11-month low of 47.7, matching a preliminary figure last week.

A reading above 50 indicates expanding activity while a figure below that level points to a contraction.

"The HSBC PMI concentrates on small companies, so we can see the small companies are more affected by the liquidity tension apparently," said Wei Yao, China economist at Societe Generale in Hong Kong.

"I think the official report does offer a slim hope that the economy is stabilising at least, but it is still a bit early to conclude that things have turned around decisively."

The better-than-expected official PMI buoyed shares in China and Asia and helped the Australian dollar, considered a proxy for Chinese growth because of the countries' strong trade links, pull away from a three-year low hit in early trade.

The politburo, China's top decision-making body, has pledged stable economic growth in the second half of this year as it presses ahead with reforms and restructuring.

While keeping the door shut for big stimulus, the government has unveiled polices to boost spending in social housing, urban infrastructure, high-speed rail and energy-saving industries, and tax breaks for small firms.

Analysts in a Reuters poll forecast annual GDP growth slowing to 7.4 percent in the third quarter from 7.5 percent in the second. Full-year growth is forecast to be 7.5 percent - in line with the official target.

FACTORY JOB LOSSES INEVITABLE

China's leaders are working to turn the economy into one led by domestic consumption and demand from a focus on manufacturing and exports, but those changes raise the possibility of job losses as traditional industries restructure.

A sub-index of the HSBC PMI measuring employment contracted for a fourth month to be at its weakest since March 2009. The official PMI indicates employment has been falling since the middle of last year.

Authorities hope the services sector can pick up the slack, but a failure to keep Chinese in jobs could threaten the social stability and economic prosperity that the Communist Party says justifies its one-party rule

More manufacturing job losses look inevitable as Beijing tackles the worst polluters and loss-making companies in sectors gripped by overcapacity as part of its economic reforms.

"With weak demand from both domestic and external markets, the cooling manufacturing sector continued to weigh on employment," said Hongbin Qu, China economist at HSBC.

China's official PMI suggests services are growing faster than manufacturing. The services measure has hovered between 53.9 and 56.7 in the past 12 months, while manufacturing has fluctuated between 49.2 and 50.9.

(Editing by John Mair)