China fac­to­ries ar­gue for more pol­icy sup­port as stocks swoon


China's fac­tory ac­tiv­ity shrank more than ini­tially es­ti­mated in July, con­tract­ing the most in two years as new or­ders fell and dash­ing hopes that the world's sec­ond­largest econ­omy may be steady­ing, a pri­vate sur­vey showed on Mon­day. The re­port fol­lowed a down­beat of­fi­cial sur­vey on Satur­day which showed growth at man­u­fac­tur­ing firms un­ex­pect­edly stalled, re­in­forc­ing views that the strug­gling econ­omy needs more stim­u­lus even as it faces fresh risks from a stock mar­ket slump.

Fears of a full-blown mar­ket crash have added a new sense of ur­gency for pol­i­cy­mak­ers in Bei­jing, with many an­a­lysts ex­pect­ing more sup­port mea­sures to be rolled out within weeks.

The fi­nal, pri­vate Caixin/Markit China Man­u­fac­tur­ing Pur­chas­ing Man­agers' In­dex (PMI) dropped to 47.8 in July, the low­est since July 2013, from 49.4 in June.

That was worse than a pre­lim­i­nary read­ing of 48.2 and marked the fifth straight month of con­trac­tion. New or­ders con­tracted af­ter grow­ing in June, while fac­tory out­put shrank for the third con­sec­u­tive month to hit a trough of 47.1, a level not seen in more than 3-1/2 years. De­te­ri­o­rat­ing con­di­tions forced com­pa­nies to cut staffing for the 21st straight month, and fac­to­ries had to re­duce selling prices to a six-month low due to in­creas­ing com­pe­ti­tion.

Yet some econ­o­mists warned against read­ing too much into the gloomy July data, ar­gu­ing that the fac­tory weak­ness may be tran­si­tory. For one, sum­mer storms in the man­u­fac­tur­ing hubs of Zhe­jiang and Guang­dong may have dented out­put, they said. And while com­pa­nies that had in­vested in the stock mar­ket were shaken by the rout, history has shown that fall­ing share prices don't af­fect real spend­ing in China, they said. "When stocks were ris­ing rapidly, con­sump­tion did not pick up," said Ju­lian Evans-Pritchard at Cap­i­tal Eco­nom­ics, cit­ing China's re­cent eq­uity rally and that in 2007/08.

In­stead, China's re­tail spend­ing grew faster af­ter share prices slumped in 2007/08, he said. "The wealth ef­fect is not ev­i­dent in China." While soft global de­mand could con­tinue to weigh on China's ex­ports, mar­ket watch­ers like Evan­sPritchard be­lieve in­creased gov­ern­ment in­fra­struc­ture spend­ing and fur­ther pol­icy eas­ing should sup­port do­mes­tic con­sump­tion in com­ing months, en­sur­ing the econ­omy meets the gov­ern­ment's 7-per­cent growth tar­get for the year.

Still, the fac­tory out­look looks slug­gish at best. The of­fi­cial fac­tory Pur­chas­ing Man­agers' In­dex (PMI) was also weaker than ex­pected, fall­ing to 50.0 in July from June's tepid growth read­ing of 50.2. The of­fi­cial sur­vey fo­cuses more on larger firms, which will likely ben­e­fit more from big in­fra­struc­ture projects than smaller com­pa­nies. While growth in the ser­vices sec­tor picked up slightly, off­set­ting some of the drag from per­sis­tent fac­tory weak­ness, ser­vices com­pa­nies rang alarm bells, too, re­port­ing that new or­ders were cool­ing and they were cut­ting jobs at a faster pace. To be sure, even some within the Chi­nese gov­ern­ment are less up­beat about the eco­nomic out­look. Sheng Songcheng, di­rec­tor of the sta­tis­tics di­vi­sion at the cen­tral bank, said that down­ward pres­sure on the econ­omy will per­sist in the sec­ond-half of the year, adding that growth in ex­ports and in­vest­ment is not likely to pick up.



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