China’s Manufacturing Sector Shrinks in June

China’s manufacturing sector contracted in June for the second consecutive month.

The industrial Purchasing Managers’ Index (PMI) stood at 49.5, matching May’s reading and the median forecast from a Reuters poll. A PMI below 50 indicates contraction.

Zhao Qinghe, a senior analyst at the National Bureau of Statistics, highlighted insufficient market demand for manufacturing. The new orders index fell for the third consecutive month to 49.5.

Key raw material purchase prices and the producer price index saw significant declines. The purchase price index dropped 5.2 points to 51.7, while the producer price index fell 2.5 points to 47.9.

Zhao attributed these drops to lower prices for bulk commodities and insufficient market demand, impacting sectors like fuel processing and ferrous metals.

The non-manufacturing business activity index declined by 0.6 points to 50.5.

This decrease was driven by a 2.1-point drop in the construction industry index, which fell to 52.3. Zhao linked this slowdown to heavy rains in southern China.

Capital market services and real estate sub-indexes remained below critical thresholds. The real estate sector faced prolonged challenges and weak domestic demand.

Real estate investments dropped by 10.1% over the first five months of the year.

Prices continued to decline across cities nationwide despite Beijing’s efforts to revive the market by purchasing unsold homes and cutting mortgage rates.

Economic data from early June showed that industrial production growth slowed to 5.6% year-on-year in May, down from 6.7% in April.

The lack of effective demand also negatively impacted industrial profits, which grew more slowly in May than in April.

China’s Economic Direction

China’s Gross Domestic Product (GDP) grew by 5.3% year-on-year in the first quarter, aligning with the government’s annual target of around 5%.

At a World Economic Forum meeting in Dalian, Chinese Premier Li Qiang expressed confidence in meeting this growth target for the year.

The market anticipates new reform measures at the Communist Party’s third plenary session, scheduled for July 15–18.

Previous plenary sessions have significantly influenced China‘s economic direction.

Economists from Capital Economics warned that upcoming reforms might prioritize manufacturing, innovation, and self-sufficiency.

They suggested that this could be at the expense of boosting domestic demand. This approach could limit growth in the coming years.

In a contrasting report, Chinese media group Caixin released its version of the industrial PMI for June. Caixin’s PMI rose to 51.8 from 51.7 in May, marking the highest reading since June 2021.

It stayed above 50.0 for the eighth consecutive month. The official and private PMIs differ in methodology.

The official PMI focuses on larger state-owned enterprises, while the private PMI targets small and private companies.

China’s economic landscape shows a complex interplay of factors influencing growth.

Despite efforts to boost the market, challenges remain, particularly in the real estate sector and domestic demand. Upcoming reforms will be crucial in determining China’s economic trajectory.