Guang Niu, Getty Images
A factory employee works on an assembly line at the Zhejiang Geely Automobile Company auto factory. The Chinese economy officially plunged to a two-year low over the weekend.

Chinese Manufacturing Index Slows in July

Aug. 3, 2015
Chinese manufacturing plunged to a two-year low over the weekend, with the Caixin PMI registering just 47.8 and industrial output expanding lower than estimates to 6.8%.

BEIJING — A key gauge of Chinese manufacturing activity plunged to a two-year low in July, an independent survey showed Monday, the latest data suggesting that the world’s second-largest economy faces downward pressure in the third quarter.

The final reading of Caixin’s Purchasing Managers’ Index (PMI) came in at 47.8 for the month, the Chinese media group said in a joint statement with Markit, a financial information services provider that compiled the survey, down from a preliminary 48.2.

The figure was below the 49.4 registered in June and was the weakest reading since 47.7 in July 2013, according to previous data.

The index, which tracks activity in factories and workshops, is seen as a key barometer of the country’s economic health. A figure above 50 signals growth, while anything below indicates contraction.

“July data signaled that the downturn in China’s manufacturing sector intensified at the start of the third quarter,” Caixin and Markit said in the release. “Renewed falls in both total new work and new export orders led manufacturers to cut production at the fastest rate since November 2011.”

The result, which missed a median estimate of 48.3 in a survey by Bloomberg News, came after China announced on Saturday that its official PMI slowed further in July, decelerating to 50.0 from 50.2 in June according to the National Bureau of Statistics.

Caixin took over sponsorship of the PMI survey from British banking giant HSBC from July.

“The weaker Caixin PMI, together with a lower official PMI, suggests that growth momentum may have slowed slightly in July,” Nomura economists said in a reaction.

The results mean that China’s year-on-year industrial production growth for last month may come in lower than their current estimate of 6.8%, they added. Industrial output expanded 6.8% in June, an acceleration from May.

Julian Evans-Pritchard, China economist at Capital Economics, said that bad weather was a factor in the July PMI results. 

“The weak readings partly reflect temporary disruptions to factory activity as a result of a number of tropical storms that hit China’s key manufacturing hubs over the past month,” he said in a report.

Many of China’s export-oriented factories are concentrated in coastal areas in the south and east, and are more vulnerable to adverse weather during the summer storm season.

Slow growth could spark more stimulatory measures

China’s economy, a key driver of global growth, expanded 7.4% last year, its weakest since 1990, and has slowed further this year, growing 7.0% in each of the first two quarters. 

The PMI releases are the first key snapshots of economic performance in the July-September quarter.

Authorities accept the need to steer China’s growth lower to make it more sustainable and driven by consumer demand rather than investment, but have taken stimulatory measures to put a floor under the slowdown.

This is aimed at ensuring that employment — a pillar of social stability in Communist Party-ruled China — is not negatively affected. 

The central People’s Bank of China in June announced its latest cut in benchmark interest rates, the fourth such move since November, in an effort to boost lending as fuel for the economy.

It has also lowered cash reserve requirements for banks, as well as other steps such as easing mortgage policies to boost the property market, a key reserve of wealth for many Chinese.

Economists said that China’s recent stock market convulsions – the key Shanghai stock index plunged more than 30% from a June 12 peak before rebounding on official intervention measures – may have impacted PMI survey results.

“Although the recent stock market volatility has hurt business sentiment and may have led firms to provide more downbeat responses to the latest PMI surveys, we think it will have a limited impact on real economic activity”, Evans-Pritchard wrote. 

By Kelly Olsen

Copyright Agence France-Presse, 2015

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