As the trade war breaks out, Chinese factories are preparing for a third month of activity in decline

BEIJING (Reuters) – A Reuters poll is expected to contract for the third consecutive month in July, highlighting growing tensions over the world's second-largest economy following a long-running trade war with the world's largest economy. United States.

According to the median forecast of 34 economists, the official PMI for July is expected to rise from 49.4 in June to 49.6. This always left below the 50-point mark that separates the expansion from the contraction on a monthly basis.

Another month of weak manufacturing activity should fuel Beijing's expectations, which will add to the many support measures put in place over the past year, especially since the Chinese trade war American continues and becomes expensive.

"The slowdown in the real estate market, stifled by official policy, and the slowdown in the global economy have further weakened China's manufacturing sector," said Nie Wen, an economist at Hwabao Trust.

Chinese observers said Beijing's recent stimulus package would take time to impact the economy as a whole, and many badysts believe additional stimulus is needed to avoid a slowdown more marked and help stabilize growth.

Growth in the Central Asian economy slowed to a 27-year low in the second quarter, showing why policymakers from India to Australia, Europe and the United States are worried about China's effect on world production.

Weak domestic and international demand has led to a period of slowdown in Chinese manufacturing activity for several months, and a sharp rise in the US tariff announced in May threatens to wipe out lean margins.

Some manufacturers reduced their sales target this year as customers delayed their purchase orders, while others had already relocated their production capacity to neighboring countries to avoid the adverse impact on tariffs.

Profits earned by Chinese industrial enterprises contracted in June after a brief rise in the previous month. The revenues of these large companies have declined since the second half of 2018 due to increasing economic pressure, many decisions that are commercially different, and reduced investments in the manufacturing sector.

The official PMI and its sister survey on the services sector will be released on Wednesday, the second day of the US and Chinese negotiators' meeting in Shanghai for their first face-to-face exchange since last month's G20 truce.

Expectations about progress during the two-day meeting in Shanghai are low. Officials and companies therefore hope that Washington and Beijing can at least clarify the commitments of "goodwill" and pave the way for future negotiations.

For the past two years, the world's two largest economies have imposed tariffs of several billion dollars on their imports, disrupting global supply chains and disrupting financial markets.

"We believe that the current trade truce between the US and China will be temporary, and that Trump will likely increase tariffs on almost all imports from China early next year," writes Capital Economics in China. a note.

So far, Beijing has relied on a combination of fiscal stimulus and monetary easing to overcome the economic slowdown, including hundreds of billions of dollars in infrastructure spending and tax cuts for businesses.

But the economy has been slow to react and business confidence remains fragile, weighing on investment.

Market watchers say the People's Bank of China (PBOC) will further follow the US Federal Reserve rate cuts that are widely expected this week by lowering its short-term money market rates, instead of reducing for the first time rate. in four years.

China's central bank governor, Yi Gang, said the country's current interest rate level was appropriate, adding that the curtailment of the PBOC's monetary policy would depend on China's economic conditions.

The Politburo, one of the leading decision-making bodies of the ruling Communist Party, is expected to meet later this month to discuss economic and political issues for the remainder of 2019.

China is still considering more aggressive measures, such as interest rate cuts, as a last resort, should the dispute worsen, Reuters reported last week, citing government advisers involved in talks. internal policies.

"We anticipate that more political support will be deployed in the second half of the year, but its strength will not be greater than last year, with the government wishing to have some leeway. maneuver to deal with any future shock, "said Nie. He expects the authorities to announce more measures at the Politburo meeting to boost the consumption and development of high-tech industries.

A survey of private companies – the Caixin / Markit Manufacturing Purchasing Managers (PMI) index, which targets Chinese small and medium-sized enterprises, should also show that factory activity was in contraction moderated last month . 49.6 from 49.4 in June.

Caixin's manufacturing PMI will be released on August 1 and its services PMI survey on August 5.