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Anemic data raise China growth fears

Chinese factory output has weakened, weighed down by lackluster domestic demand.

Story highlights

  • China's manufacturing sector weakened sharply, an indication that the country's growth slowdown
  • The official purchasing managers' index fell to 50.1 last month from 50.8 in May
  • The lowest reading in four months and just slightly above expectations
  • Dipping towards the 50 line demarcates move toward factory output contraction

China's manufacturing sector weakened sharply in June, an indication that the country's growth slowdown has deepened as the government has refrained from stimulating the sluggish economy.

The official purchasing managers' index fell to 50.1 last month from 50.8 in May. It was the lowest reading in four months and just slightly above expectations.

In dipping towards the 50 line, which demarcates expansion from contraction in the PMI, the survey result means that Chinese factories have virtually stopped growing, weighed down by lacklustre domestic demand.

Even more alarming was a separate PMI published by HSBC that is more weighted to smaller companies in the private sector than the official survey, which focuses on state-owned companies. The HSBC PMI fell to 48.2 in June, a nine-month low.

"In terms of the magnitude of decline, this is the biggest decline in the past year," said Ding Shuang, an economist with Citi. "This is a picture of weak demand, both domestically and externally."

The anaemic data comes on the heels of a cash crunch that hit the Chinese financial system over the past two weeks, driving interbank rates to unprecedented highs and leading to a momentary freeze of the country's credit market.

Because it takes time for financial stresses to be transmitted to the broader economy, the impact of the liquidity squeeze will only really begin to show in July, suggesting that there could be worse to come.

Weakness was felt across the board in the official June PMI. The sub-index for new orders fell to 50.4 from 51.8, while the output sub-index declined to 52.0 from 53.3. More worrying for the government, the employment sub-index remained depressed at 48.7, edging down from 48.8, an indication that factories are cutting jobs.

China's economy slowed to 7.7 per cent growth year-on-year in the first quarter from 7.9 per cent in the final three months of 2012. Most analysts expect a further slowdown in the second quarter and a continued grind toward slower growth over the rest of the year.

The Chinese government is targeting 7.5 per cent growth this year. Analysts from Goldman Sachs to HSBC have forecast that China will dip below that target. It would be the first time that China has missed its annual growth goal since the Asian financial crisis 15 years ago.

As the evidence accumulates of weaker growth, one of the key questions is whether the country's new leaders will tolerate the slowdown or, like their predecessors, try to deploy stimulus measures to reverse the trend.

So far they have shown restraint and have indicated that they want to guide the Chinese economy to a slower, more sustainable growth model after the past decade in which it averaged 10 per cent growth but also accumulated problems from debt to industrial overcapacity.

Over the weekend Xi Jinping, China's president, said officials shouldn't be evaluated exclusively on their record in delivering growth and that more importance should be placed on achievements such as environmental protection.

But in separate comments, Li Keqiang, China's premier, said that the country "had the conditions and the capability" to hit its growth targets.