China's factory outlook dimmed again in June ahead of G-20 truce

BEIJING: The outlook for China’s manufacturing sector continued to deteriorate in June as weakness in the domestic economy combined with new tariffs the U.S. imposed the previous month on Chinese goods.

The manufacturing purchasing managers’ index stayed at 49.4, according to data released by the National Bureau of Statistics on Sunday. That’s worse than the 49.5 forecast in a Bloomberg survey of economists.

 A sub-index gauging new export orders edged down further, highlighting the pressures the additional tariffs on $200 billion of goods impose on exporters. A reading below 50 signals contraction.

The weak result indicates that the recovery in the first half waned further, ahead of the truce reached this weekend in Osaka between the U.S. and China that prevents further tariff increases for now. A trade truce is unlikely to be enough by itself to put the recovery back on track any time soon.

"China’s slowdown now right now is only partly due to the trade war,” said Larry Hu, chief China economist at Macquarie Group Ltd. in Hong Kong.

"The global slowdown and domestic loss of momentum are the more important factors. China’s economy will not bottom out until the government rolls out more aggressive policy measures, ” he said, which would include boosting infrastructure investment funding, property investment and consumption.

The non-manufacturing gauge, which covers both services and construction, edged down to 54.2 from 54.3 in May, still firmly in the expansion zone.

 What’s more worrying is the worsening jobs market: the employment sub-index of the manufacturing sector fell further to the lowest level since 2009 and that of the non-manufacturing dropped to the worst since early 2016.

The slowdown is hurting smaller factories most, while larger ones are not prospering either.

 An index for large manufacturing companies dropped to the contraction zone for the first time in more than three years. 

A collection of early data by Bloomberg also showed the economy worsening in June, with poor small business confidence and weak trade.

"The second quarter will be the lowest point of China’s economy this year,” said Lu Zhengwei, chief economist at Industrial Bank Co in Shanghai. 

Stimulus policies "are cushioning impacts from the trade tensions. If China and U.S. reach a deal this year, policy will no longer be as supportive. If they don’t, policy will be more aggressive. ” - Bloomberg
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