Factory activity in China contracted for a fifth month, and pressure for policy support continues

BEIJING, Aug 31 (Reuters) – China’s manufacturing activity contracted for the fifth straight month in August, an official survey showed on Thursday, keeping pressure on officials to provide support to boost economic growth amid weak demand at home and abroad.

On the bright side, new orders returned to expand for the first time in five months, and factory owners noted that producer prices were improving for the first time in seven months, although the broad services sector continued its downward trend.

The official purchasing managers’ index rose to 49.7 from 49.3 in July, according to the National Bureau of Statistics, remaining below the 50-point level that separates contraction from expansion. The reading was higher than expected at 49.4.

The PMI provides the first clue on how the world’s second-largest economy will perform in August, following a strong string of trade, factory and retail data in July. However, in a hopeful sign for growth, conditions have not deteriorated appreciably although the survey showed factories are under continuing pressure.

Japan and South Korea, China’s main industrial rivals in the region, also reported sharp declines in production on Thursday.

“It’s too early to tell, but today’s edition suggests that a sequential pick-up in growth activity in the third quarter could still be possible,” said Louise Law, chief economist at Oxford Economics.

“Especially if the next stimulus starts to fuel the economy.”

The world’s second-largest economy risks missing Beijing’s annual growth target of about 5%, as officials grapple with a worsening property decline, weak consumer spending and declining credit growth, prompting major banks to cut their growth forecasts for this year.

Over the weekend, China announced a halving of stamp duty on stock trading, its first tax cut since 2008, and on Friday approved affordable housing guidelines to improve access to first-home mortgages.

Some Chinese state-owned banks will also soon cut interest rates on existing mortgage loans, although analysts expect house prices to show no growth this year.

These new moves followed a set of measures aimed at reviving expensive purchases, particularly new energy vehicles. However, many analysts see little chance of any drastic stimulus amid concerns about mounting debt risks.

Pan Gongsheng, governor of the People’s Bank of China, said on Wednesday, at a meeting with banks and private companies, that China will open equity, bond and loan financing channels for private companies and guide institutional investors to buy their bonds.

Policymakers remain under pressure to boost domestic demand as the global economy continues to slow.

High interest rates and inflation in the US, Europe and other major export markets continue to dampen demand for Chinese goods. The sub-index for new export orders contracted for the sixth month in a row.

“More economic measures may be needed to support growth,” said Frederic Neumann, chief Asia economist and co-head of global Asia research at HSBC.

“Especially in an environment where new export orders continue to contract due to weak global demand, manufacturers will need to rely on domestic demand to make up the shortfall.”

The non-manufacturing PMI, which includes sub-indices for service and construction sector activity, fell to 51.0 from 51.5 in July, led by a continued decline in services activity, while the composite PMI, including manufacturing and non-manufacturing activity, rose to 51.0. 51.3 out of 51.1.

“Today’s data shows that… enhanced policy measures are gradually making up for short-term factors that have held back the consolidation and recovery of the Chinese economy,” said Bruce Pang, chief economist at Jones Lang LaSalle.

Going forward, he added, “actual implementation and effectiveness of policy support will be the main indicator to watch.”

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