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