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 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 Evans-Pritchard 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.
A DIFFICULT SIX MONTHS
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.
His guarded view resonates with some companies as well.
China Glass Holdings Ltd on Friday became the latest in a growing
list of firms to issue profit warnings due to weak demand, saying it
expected a first-half loss.
China's slowdown is also forcing many Western companies to take a
hard look at their businesses there, leading many to reduce
investments and costs.
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“We had five fabulous years in China where we grew strong
double-digits, and it has been gradually slowing. Currently, in
China we had negative order intake,” Frans van Houten, chief of
Dutch electronics group Philips NV said last week.
“We need to be much more modest on expectations with regard to China
growth; that's just being realistic,” he said.
Share markets across Asia including Shanghai fell on Monday and
global prices of commodities such as copper and crude oil skidded on
worries about the Chinese economy.
MORE SUPPORT MEASURES
The People's Bank of China (PBOC) has already cut interest rates
four times since November and repeatedly loosened restrictions on
bank lending in its most aggressive stimulus campaign since the
global financial crisis.
Beijing has also intervened heavily recently to stabilize stock
markets, which has raised questions over its commitment to
free-market reforms seen as essential for its transition from an
export-led economy to one based on consumption.
While there is little evidence yet that the 30-percent stock market
slump since mid-June has hit spending, analysts say wild price
swings will rattle consumer and business confidence and could dampen
activity in the financial services sector.
Buffeted by softening investment growth, unsteady domestic and
foreign demand and a cooling housing market, China's growth is
widely expected to grind to its lowest in a quarter of a century
this year at 7 percent, from 7.4 percent in 2014.
After months of weakness, industrial output, retail sales and
investment all grew slightly more than expected in June, raising
hopes that earlier policy easing was finally starting to pay off.
July data will be released over the next two weeks.
In an acknowledgement of difficulties ahead, the Politburo, one of
the Communist Party's elite ruling bodies, promised last week to
step up policy adjustments to keep growth stable.
Even if the stock market steadies, Tim Condon from ING Group in
Singapore said Beijing will still need a continued housing market
turnaround to hit its 7 percent growth target for 2015.
However, while home sales and prices are improving slowly in bigger
cities after a year-long slump, a massive overhang of unsold homes
could keep real estate under pressure well into next year, deterring
developers from starting new construction and depressing demand for
materials from cement to steel.
(Reporting by Beijing Newsroom and Koh Gui Qing; Editing by Kim
Coghill)
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