China factory activity seen cooling in June, crackdown on debt risks drag

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[June 29, 2017]  BEIJING (Reuters) - Factory activity in China is expected to have cooled slightly in June from the previous month, a Reuters poll showed, as manufacturers are pressured by government efforts to reduce high levels of debt across the world's second-biggest economy.

Most analysts agree that Beijing's crackdown on debt risks and tightening financial conditions will slow China's momentum after a strong start to the year when first quarter growth came in at 6.9 percent.

Corporates are already facing higher financing costs, which could ripple through to decisions on investment, hiring, and wages over the next year.

Moreover, a raft of property curbs have effectively cooled sales in the biggest cities and started dragging on property investment. Indeed, investment growth in the real estate sector slowed for the first time in three months in May.

That could hurt the construction sector - a big boon for the economy in the past few quarters.

"We believe that deleveraging has continued in June and it had some cooling impact on the economy," said Kelvin Lau, senior economist for Greater China at Standard Chartered.

"We are also taking into account the cooling measures on the real estate sector."

The official manufacturing Purchasing Managers' Index (PMI) is expected to come in at 51.0, which would be the lowest reading since September though capping the eleventh straight month of growth, according to a median forecast of 34 economists polled by Reuters.

The index stabilized at 51.2 in the months of April and May, after hitting 51.8 in March - its highest level in nearly five years.

Interestingly, the official PMI survey, which will be released on June 30, along with the official services PMI, showed a divergence with the private Caixin/Markit PMI manufacturing survey in May, which focuses more on small and mid-sized firms.

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Steam and smoke rise from a factory in the Guantao Chemical Industry Park in the early morning near the villages of East Luzhuang and Nansitou, Hebei province, February 22, 2017. REUTERS/Thomas Peter/File Photo

The private survey, due on July 3, showed the sector struggling to motor on - a contradiction that analysts suspected showed heavy industry was the biggest beneficiary of a construction boom and government stimulus support.

China's economy generally remained on a solid footing in May, with profits at industrial companies bouncing back from April.

China's export growth more than halved in May, in line with a general cooling in demand for electronic gadgets. But while trade friction between China and some key trading partners remains, an overall improvement in global growth means shipments from the world's largest exporter will likely remain strong this year.

And analysts say Beijing will be keen to keep key sectors of the economy growing at a steady pace so it can meet its full-year growth target of about 6.5 percent, down from 6.7 percent in 2016 - the slowest annual pace in 26 years.

All the same, the challenges for policymakers are aplenty.

Producer price inflation (PPI), for instance, fell for the third straight month in May on tumbling prices of raw materials, reinforcing expectations of a slowdown that would be bad news for debt-laden firms.

Massive debt - standing at nearly 300 percent of GDP - and serious budgetary imbalances mean Beijing can't carry on pump priming - factors that analysts say will eventually drag on growth during the year.

(Reporting by Yawen Chen and Ryan Woo; Editing by Shri Navaratnam)

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