China factory activity slips again

An employee working at a steel factory in Dalian, Liaoning Province. China's PMI ticked down to the 50 mark, which separates contraction from expansion.
An employee working at a steel factory in Dalian, Liaoning Province. China's PMI ticked down to the 50 mark, which separates contraction from expansion.PHOTO: REUTERS

More stimulus expected as manufacturing flatlined in June

SYDNEY • China's vast factory sector flatlined in June as exports shrank and jobs were cut, a worrying trend evident across Asia that argues for yet more policy stimulus as doubts gather over the potency of measures taken so far.

The hard times signalled by a range of surveys were not what the world needed a week after Britain's vote to leave the European Union. Most of the responses from manufacturers also preceded the Brexit vote, suggesting July could be even tougher.

Among the many surveys out yesterday, China's official Purchasing Managers' Index (PMI) slipped a tick to 50 in June, dead on the level that is supposed to separate growth from contraction. One saving grace was the services sector measure, which nudged up to 53.7 in a positive sign for consumer activity. More worrying was the Caixin version of the PMI, which covers a greater share of smaller firms, where the index fell to a four- month trough of 48.6 in June, from 49.2 in May.

"Panellists widely commented that poor market conditions and a drop in new work had led them to cut output," reported Caixin. "Data suggested that part of the weakness stemmed from softer foreign client demand, with new export sales declining for the seventh month."

That had to be a disappointment to Beijing which has resorted to ever-looser fiscal and monetary policy to support growth and jobs in the world's second largest economy.

It was a frustration likely shared by the Bank of Japan which found major manufacturers in a morose mood despite all its attempts at aggressive easing. The reasons were clear in the Markit/Nikkei measure of Japan's PMI which edged up slightly to 48.1 in June, but stayed in contractionary territory for the fourth straight month.

Government data were no better with household spending down for the third month in a row and core consumer prices suffering their biggest annual drop since 2013.

The news from South Korea was relatively cheery as its PMI reached a six-month high, yet at 50.5 it was just barely into expansionary territory. A separate report showed shipments from the world's sixth-largest exporter fell for an 18th straight month.

Likewise, electronics powerhouse Taiwan reported some improvement but again growth was only marginal. India's PMI did hit a three-month top of 51.7, but it remains an outlier in an Asian region which could face a whole new threat should the Brexit vote herald a wider retreat from free trade.

Mr Vaninder Singh, an economist at Royal Bank of Scotland, noted the region had been the greatest beneficiary of globalisation and any shift to trade barriers or closed borders would hurt Asia the most.

"The impact will be limited in the near term but much more significant in the medium term," said Mr Singh. "We expect this event and what it represents to subtract as much as 0.3 per cent from growth next year compared to our pre-event baseline, and expect Asian central banks to respond with another round of easing."

REUTERS

A version of this article appeared in the print edition of The Straits Times on July 02, 2016, with the headline 'China factory activity slips again'. Print Edition | Subscribe