China growth momentum slows further amid calls for more policy support

China’s economy lost more steam in June as manufacturing activity contracted again and other sectors failed to build momentum, as calls grow for more policy support.
 

The official manufacturing purchasing managers’ index was 49, barely an improvement from May and still in contraction, National Bureau of Statistics data published Friday showed. The non-manufacturing gauge — which measures activity in construction and services — slipped to 53.2 from 54.5 the prior month, still expanding but at a weaker pace. 

A reading below 50 signals contraction from the previous month and anything above that points to expansion. 

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“The PMI figures failed to rebound and reinforce the message that the economy is slowing down,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. “The question is no longer whether the government will deliver growth stimulus. They have been doing so. The right question to ask is the quality of stimulus.”

Chinese stocks were relatively muted in early trading. The CSI 300 Index gained as much as 0.5% in early trading after declining for two days. The Hang Seng China Enterprises Index rose up to 0.8%. The offshore yuan gained 0.2%, edging up from its weakest level since November.

Speculation about potential policy support has been mounting as the recovery for the world’s second-largest economy loses traction. After a burst of activity in the first quarter, consumer spending is slowing. The housing rebound has fizzled, exports have weakened and infrastructure investment has been muted, too. 

More from the PMI data:

The employment sub-gauge for the non-manufacturing sector fell to 46.8 from 48.4 in the previous month

A similar gauge for the manufacturing industry slid to 48.2 from 48.4

A sub-gauge of export orders received by factories fell to 46.4 in June, the lowest reading since January

Overall new orders sub-gauge was 48.6, up from 48.3 in May — though still in contraction
 

What Bloomberg Economics Says ... 
 

“Weakness in services and a slowdown in construction dragged down growth in the non-manufacturing sector. A slightly narrower contraction in manufacturing was nothing to cheer about — that only reflected more working days in the month. The People Bank of China trimmed rates in June. Friday’s weak data reinforce the case for further easing.”

— Chang Shu and Eric Zhu, economists

Read the full report here.

The People’s Bank of China cut policy interest rates this month for the first time in nearly a year, signaling looser monetary policy. But experts largely project that stimulus this year will be moderate, given how Beijing’s scope for monetary and fiscal support has been constrained. 

Data has shown an ongoing contraction in demand, with overseas demand deteriorating faster, according to Bruce Pang, chief economist and head of research for Greater China at Jones Lang LaSalle Inc. He added that small and private companies are under rising pressure, while non-manufacturing firms are seeing sharper job cuts. 

“All these require a more forceful package to support the economy to be introduced at a sooner date,” Pang said.

Along with cutting interest rates, authorities have extended tax breaks for electric car buyers and eased home purchase restrictions in more cities. But they’ve been slow to introduce additional measures. 

Limitations include potential strains for cash-strapped local governments, which are struggling to repay debt. More rate cuts, meanwhile, would further widen the yield gap with the US, adding downward pressure on the yuan.