Factory activity in China decreases for the fourth month as business problems get worse

PHOTO FEATURE: A worker welds auto parts in an auto accessories manufacturing workshop in Huaibei, Anhui province, China, June 28, 2019. REUTERS / Stringer

August 31, 2019

By Roxanne Liu and Dominique Patton

BEIJING (Reuters) – In the month of August, Chinese factory activity fell for the fourth consecutive month, as the United States exerted greater pressure on trade and domestic demand remained sluggish. , suggesting a further slowdown in the world's second-largest economy.

The continuing weakness of China's large manufacturing sector could fuel expectations that Beijing needs to implement stimulus more quickly and aggressively to overcome the worst economic downturn in recent decades.

The Purchasing Managers' Index (PMI) dropped to 49.5 in August, China's National Bureau of Statistics announced on Saturday, up from 49.7 in July, below the 50-point mark that separates monthly contraction.

A Reuters poll showed analysts expected August's PMI to remain unchanged from the previous month.

The official gauge of factories showed increasing trade friction with the United States, and the slowdown in global demand continued to wreak havoc on Chinese exporters.

Export orders declined for the fifteenth consecutive month in August, albeit at a slower pace, with the sub-index at 47.2 versus 46.9 in July.

The total number of new orders – both domestic and foreign – also continued to decline, indicating that domestic demand remains weak, despite the many measures to stimulate growth over the past year .

"The volume of exports to the United States before the rate hike has supported trade and overall growth in activity, but this effect is expected to ease in the coming months," analysts said. Goldman Sachs in a note.

Manufacturers of consumer-oriented industries, such as the automotive sector, are particularly vulnerable. Builders such as Geely <0175.HK> and the great wall <601633.SS> have reduced expectations in terms of sales and profits.

The data show that activity in small and medium-sized enterprises has contracted, although large manufacturers, often backed by the government, have managed to expand in August.

Factories continued to cut jobs in August in an uncertain economic environment. The employment sub-index fell to 46.9 from 47.1 in July.

escalations

The month of August was marked by a dramatic escalation of Sino-US trade, with President Donald Trump announcing earlier this month that he would impose new tariffs on Chinese products from the 1st of September, China letting its currency weaken sharply a few days later.

After Beijing's response with retaliatory tariffs, Trump said existing taxes would also increase in the coming months. The combined movements now effectively cover all exports from China to the United States.

Trump said Friday night that business teams from both countries would continue to talk and meet in September, but that Chinese tariff increases scheduled for Sunday will not be delayed.

The US president said earlier this week that China wants to reach a deal "very badly", citing what he described as growing economic pressure on Beijing and job losses.

But most analysts strongly doubt the end of the conflict and some have recently reduced their growth forecasts for China in the coming quarters.

The sudden deterioration of trade relations has prompted questions about the need for China to take stronger measures to prevent growth from slipping below 6% this year, the lowest level of its target being around 6.0 to 6.5%.

Analysts generally estimate that Beijing will reduce for the first time in four years some of its major lending rates in September, to help stabilize growth.

Prior to the latest escalation of trade, sources had already told Reuters that large cuts in benchmark rates were seen as a last resort, as policymakers feared that this could fuel a further increase in debt and reduce profit margins. banks, thus increasing the risks for the financial sector.

To date, Beijing has relied on a combination of fiscal stimulus and monetary easing to cope with the economic downturn, including hundreds of billions of dollars in infrastructure spending. and tax cuts for businesses.

Analysts note, however, that investment growth in infrastructure has remained weak, despite earlier stimulus measures, highlighting the need for additional support.

GROWTH OF SERVICES

Growth in China's service-sector activity accelerated for the first time in five months in August, with official figures coming from a separate business survey rising from 53.7 in August to 53.8.

Beijing relied on a strong services sector to mitigate the economic impact of business uncertainties and weak manufacturing.

However, despite the higher overall figure, activity in the real estate sector has contracted, the statistics office said in a statement.

The service sector has been supported by rising consumer wages in China and the strong spending power of recent years. However, the sector slowed down at the end of last year due to a more general slowdown.

(Report by Roxanne Liu and Dominique Patton, edited by Clarence Fernandez and Jacqueline Wong)