China's economic struggles continue as manufacturing activity contracted for the second consecutive month in June, while the services sector slowed to a five-month low, according to official surveys released on Sunday. These figures have intensified calls for additional government stimulus to support the economy.
The National Bureau of Statistics (NBS) reported that the Purchasing Managers' Index (PMI) for manufacturing remained unchanged from May at 49.5, below the 50-mark that separates growth from contraction. This aligns with the median forecast of 49.5 in a Reuters poll, highlighting persistent weaknesses in the industrial sector.
"Actual industrial activity should be stronger than the data suggests as our observation is that the official PMI fails to fully capture the current export momentum, which has been the major economic driver this year," said Xu Tianchen, senior economist at the Economist Intelligence Unit. However, Xu noted that both external and domestic demand remain insufficient to absorb China's manufacturing capacity, hindering a recovery in producer prices.
Key sub-indices, including new orders, raw material stocks, employment, supplier delivery times, and new export orders, were all in contractionary territory, according to the NBS survey. While China's exports exceeded forecasts in May, analysts remain skeptical about the sustainability of this trend given rising trade tensions between Beijing and Western economies. Domestically, a prolonged property crisis continues to weigh on demand.
The non-manufacturing PMI, which includes services and construction, fell to 50.5 from 51.1 in May, its lowest level since December. The services PMI dropped to 50.2, a five-month low, while the construction PMI slipped to 52.3, the weakest reading since July of the previous year.
Analysts expect the Chinese government to introduce more policy support measures in the near term. A government pledge to boost fiscal stimulus is seen as essential to stimulating domestic consumption. "The weak PMI figures naturally call for more supportive policies from the Chinese government. However, the room for monetary policy easing is limited for the time being, as the Chinese currency is under pressure," said Hao Zhou, chief economist at Guotai Junan International. Zhou suggested that fiscal policy would need to take the lead, implying that the central government might issue more debt to bolster domestic demand.
High local-government debt and deflationary pressures are casting a long shadow over recovery prospects, despite a slew of measures introduced since last October. The People's Bank of China recently announced a relending program for affordable housing to accelerate sales of unsold housing stock, aiming to better align supply and demand.
Premier Li Qiang, addressing the World Economic Forum, emphasized the growth of new industries as a support for healthy economic development. "Since the beginning of this year, China's economy has maintained an upward trend... and is expected to continue to improve steadily over the second quarter," Li said. Economists and investors are looking to the upcoming Third Plenum, scheduled for July 15-18, where top Communist Party officials will gather in Beijing to discuss economic policies.
Contrasting with the official data, a private survey conducted by Caixin showed an expansion in manufacturing activity among private firms, with the Caixin manufacturing PMI rising to 51.8 in June, up from 51.7 in May. This survey, compiled by S&P Global, marked the sixth consecutive month of improvement and suggested healthier domestic and international demand for Chinese goods.
"The divergence between the Caixin and the official PMIs has widened further from May and is likely due to differences in the sectors covered," analysts from Goldman Sachs noted. The Caixin survey focuses more on export-oriented and consumer-related companies, while the official PMI is tilted towards manufacturers of industrial materials such as steel, cement, and chemicals, which are more susceptible to slowdowns in fixed-asset investments.
Despite stronger demand for consumer and intermediate goods, the outlook for manufacturers remains clouded by recent tariff announcements from the US and European Union. These have dampened sentiment, with the gauge for future output expectations falling to its lowest level since November 2019, according to Wang Zhe, senior economist at Caixin Insight Group.
In addition to economic pressures, geopolitical tensions are also weighing on sentiment. The EU recently announced additional tariffs of up to 38.1% on electric vehicles imported from China, citing Beijing's unfair support for its companies. This follows the United States' decision to quadruple tariffs on Chinese EVs from 25% to 100%, a move aimed at boosting American jobs and manufacturing.