China’s factory activity declined for a third straight month in June and weakness in other sectors deepened, official surveys showed on Friday, adding pressure for the authorities to do more to shore up growth as demand falters at home and abroad.
The world’s second-largest economy grew faster than expected in the first quarter largely due to robust service consumption, but policymakers have been unable to sustain the same momentum in the second quarter.
Service sector activity for June also recorded its weakest reading since China abandoned its strict Covid-19 curbs in late 2022, data from the National Bureau of Statistics (NBS) showed.
The official manufacturing purchasing managers’ index (PMI) inched up to 49 from 48.8 in May, staying below the 50-point mark that separates expansion from contraction and in line with forecasts.
New orders and new export orders shrank for the third straight month, with export orders contracting at a faster rate.
The non-manufacturing PMI fell to 53.2 from 54.5 in May, indicating a slowdown in service sector activity and construction.
“Domestic tourism and dining out have been making up for lost time in the early part of the year. But there is only so long that this can go on,” said Mr Rob Carnell, regional head of research, Asia-Pacific, at ING.
“Other indicators of retail sales suggest that it remains well above historical trends and… some further moderation over the second half of this year.”
The NBS’ separate service index dropped to 52.8 from 53.8 in May, its lowest since December when China scrapped strict Covid-19 curbs.
The readings pushed the renminbi to its lowest since November, while the Australian dollar, which is highly sensitive to economic developments in China, also slipped.
“After a short-lived reopening boost, the service sector appears to be settling into a new post-pandemic normal of slower growth,” wrote Mr Julian Evans-Pritchard, head of China economics at Capital Economics.
When China abandoned its Covid-19 controls, economists anticipated its economy would recover quickly and emerge as a key driver for global growth. Six months on, however, analysts are downgrading their forecasts for the rest of 2023.
Nomura has been the most bearish, cutting its forecast for growth in China’s 2023 gross domestic product (GDP) to 5.1 per cent from 5.5 per cent. That downgrade even takes into account the prospect of new stimulus.
The government has set a modest GDP growth target of about 5 per cent after badly missing its 2022 goal. It has pledged to promote a sustained economic recovery “in a timely manner”.
China cut its key lending benchmark rates in June, the first such reductions in 10 months, to shore up activity.
Sources involved in policy discussions told Reuters that China will roll out more stimulus measures, but concerns over debt and capital flight will keep measures aimed at shoring up weak demand in the consumer and private sectors.
ING’s Mr Carnell said that while Beijing is likely to provide some support, it will not “resemble anything like the financial bazooka that some want to see but will instead be more of a buckshot spray of smaller, more targeted measures that may not move the GDP needle substantially”.