Manufacturing growth hits 8-month low

Optimism is subdued amid tough market conditions, strict environmental policies and the potential impact of the US-China trade war

China's manufacturing activity cooled in July to grow at the slowest pace for eight months, with output and new business both expanding at softer rates, according to a private report released yesterday.

The Caixin China General Manufacturing Purchasing Managers’ Index dipped 0.2 points to 50.8 last month from June, according to the survey conducted by financial information service provider Markit for Caixin Media.

A reading above 50 signals growth; below 50 is a contraction.

The trend echoed the decline in the official PMI released by the National Bureau of Statistics on Tuesday which fell by 0.3 points to 51.2 in July from a month earlier.

Although still above the neutral 50 mark, the latest figure highlighted the slowest growth since November 2017. 

"Optimism towards the year ahead remained relatively subdued amid concerns surrounding tough market conditions, strict environmental policies and the potential impact of the US-China trade war," according to the Caixin report.

New order growth weakened for the second month running and was slower than the historical series trend. 

Data suggested that reduced external demand contributed to the slowdown, as exports fell for the fourth month in a row, the report said.

Notably, new export orders fell at the steepest pace for 25 months in July.  

Manufacturing sector employment continued to fall in July, with some companies downsizing.

The further reduction in staffing levels and the rise in new orders contributed to a sustained increase in backlogs of work, though the rate of accumulation slipped to the weakest for five months. 

The report also noted that buying activity among producers increased again at the start of the third quarter, while the pace of expansion was the weakest recorded in just over a year. 

Stocks of inputs were meanwhile little-changed from the previous month, while inventories of finished items declined for the third month in a row. 

"The sub-index for stocks of finished items contracted at a steeper rate in July, while the sub-index for stocks of purchased items started expanding again — a positive sign that companies had reduced their stocks of finished products and replenished stocks of purchases," said Zhong Zhengsheng, director of macroeconomic analysis at CEBM Group.

Average input costs rose solidly in July, despite inflation softening since June. Companies linked higher cost burdens to higher raw material prices, the report said.

Meanwhile, factory gate prices increased at only a modest pace that was the slowest recorded for three months. 

"In general, the survey signaled a weakening manufacturing trend as a grim export market dragged on the sector’s performance," Zhong said. "The positive drivers were the increase in stocks of purchases and easing pressure on capital turnover."

Nomura also expected the manufacturing PMI to decline further in coming months. 

"Despite monetary easing and the announced fiscal stimulus, we still see strong headwinds and expect the economic growth to weaken further before staging a moderate rebound," said Lu Ting, chief China economist of Nomura.

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