China Economy Is Still Weak, Boosting Case for Beijing Support

An official gauge of China’s manufacturing activity picked up in July, though it remained anemic, building the case for fresh policy support from Beijing to counter economic headwinds.

The manufacturing purchasing managers index edged up to 49.7 in July from 49.4 in June, the National Bureau of Statistics said Wednesday. July’s reading was better than market expectations, suggesting a trade cease-fire between China and the U.S. and previous policy-easing measures had boosted confidence among factory owners, economists said.

Still, the index has been stuck below the 50 threshold that separates expansion from contraction for three months, underscoring persistent challenges.

Despite the uptick in July, economic conditions haven’t improved since June, said Larry Hu, an economist at Macquarie Group Ltd. “The Chinese economy is still in the middle of a downturn cycle. The worst hasn’t come yet,” he said.

Rising costs and soft demand are still squeezing some manufacturers, such as Guangdong Bell Experiment Equipment Co., which produces safety equipment to test batteries for electric vehicles.

“We have been doing poorly in the past year because of slack domestic demand, and that is not going to improve anytime soon,” said Sun Gao, a sales manager of the company. Mr. Gao also attributed the difficulties in operations to reduced government subsidies to the industry.

At a key policy meeting Tuesday, the Communist Party’s Politburo said authorities will boost policy efforts to tackle “new challenges.” Top leaders urged financial institutions to provide medium- to long-term funding to manufacturers to help stabilize manufacturing investment. However, Beijing pledged not to ease property controls as a short-term stimulus measure, suggesting it fears the extra funds would only end up in the real-estate sector.

The promised measures, together with previous tax cuts, will probably lift PMI above the 50 mark in the coming months, although the reaffirmed tightening over the property market may cripple domestic demand, said Liu Xuezhi, an economist at Bank of Communications.

Wednesday’s data showed modest recoveries across production and demand, although most measures remained in contractionary territory.

The new export subindex, an indicator of external demand for Chinese goods, increased to 46.9 from 46.3 in June. The new import subindex, an indicator of domestic demand, rose to 47.4 from 46.8. A subindex measuring production edged up to 52.1 from June’s 51.3.

Adding to the strains, an official gauge of business activity outside factory floors, also released Wednesday, showed slower expansion in July.

The data comes as senior Chinese and U.S. officials resume trade talks in Shanghai this week, although analysts have said they aren’t expecting a deal soon.

Even if talks with the U.S. yield a deal, China’s economy still faces headwinds from slowing global economic growth and a cooling property market, Mr. Hu of Macquarie said.

via HSN