China Manufacturing PMI Drops More Than Forecast as Orders Fall

The Caixin index falls at its fastest pace in four months.
By Laura Board ,

A closely watched gauge of the Chinese manufacturing sector fell at its fastest pace in four months in June, defying expectations for only a minor slowdown.

The Caixin purchasing managers' index tumbled to 48.6 in June from 49.2 in May, well under expectations for a reading of 49.1. Index readings under 50 signal contraction. The manufacturing PMI has declined for three consecutive months.

Caixin on Friday said new orders dropped in the sector and companies cut staff numbers "at a solid pace."

"Overall, economic conditions in the second quarter were considerably weaker than in the first quarter, which means there has been no easing of the downward pressure on growth," said CEBM Group economist Zhengsheng Zhong, who oversees the data. "Against the backdrop of a turbulent external environment, and in order to avert a sharp economic decline, the government must strengthen its proactive fiscal policy while continuing to follow prudent monetary policy."

The data came out on the same day as official government purchasing managers' indices, which put both the manufacturing and non-manufacturing sectors in 50-plus growth territory.

The steep plunge in the more closely watched Caixin gauge supports expectations of lackluster second-quarter growth amid an industrial and real estate slowdown.

Nomura is expecting second-quarter GDP growth of 6.3%, after 6.7% first-quarter expansion. The bank predicts this will fall to 5.7% and 5.5% in the subsequent two quarters.

"Nomura's China economists see China's macro policies turning more accommodative to offset the Brexit shock, with one 50bp RRR cut likely in July," the analysts wrote.

The Chinese government's 2016 growth target is 6.5% to 7%. Last year the economy expanded by 6.9%, in line with its target for growth of "around 7%."

Consumer demand is looking healthier, with companies including Nike (NKE) - Get Report and Carnival Cruise (CCL) - Get Report among those to have reported a China pickup recently, and the latest Westpac-MNI China consumer sentiment index showing a 1.5% increase to a reading of 115.9 in June, above the 100-level that indicates more optimism than pessimism.

The Caixin manufacturing PMI is based on questionnaires sent to more than 500 manufacturers. It's compiled in conjunction with Markit. The index has been in contraction territory for about 18 months.

The CSI 300 composite index on Friday rose 0.01% to 3,154.20 and the Hang Seng climbed 1.75% to 20,794.37.

Keris Alison Lahiff contributed to this report.

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