Chinese factory activity up among smaller firms amid broader slowdown

An employee works on the production line at Jingjin filter press factory in Dezhou, Shandong province, China August 25, 2022. REUTERS/Siyi Liu/ File Photo

By Liangping Gao and Ryan Woo

BEIJING (Reuters) - Factory activity among smaller Chinese manufacturers grew at the fastest pace since 2021 thanks to overseas orders, a private index showed, even as a broader survey indicated weak domestic demand and trade frictions had led to another industrial sector contraction.

The Caixin/S&P Global manufacturing PMI on Monday rose to 51.8 in June from 51.7 in the previous month, marking the fastest clip since May 2021 and surpassing analysts' forecasts of 51.2.

The index, which mostly covers smaller, export-oriented firms, has remained above the 50-point mark that separates growth from contraction for eight straight months.

It contrasts with a much broader official PMI released on Sunday that showed a decline in broader manufacturing activity in June, the second straight month of weakness. Activity in the services sector plumbed a five-month low.

The Caixin PMI survey showed manufacturing output growth hit a two-year high in June. The orders index, including the overseas orders index, remained in expansionary territory last month, albeit at a slower rate.

Demand for consumer and intermediate goods was stronger than that for investment goods, said the survey.

China's exports exceeded forecasts in May, but analysts said the jury is still out on whether export sales are sustainable on top of recent trade tensions.

"The PMIs for June were mixed, but on balance suggest that the (economic) recovery lost some momentum last month," Zichun Huang, China Economist at Capital Economics, wrote in a research note.

The surveys were also possibly weighed down by negative sentiment due to recent tariff announcements from the United States and the European Union, Huang added.

The EU is set to impose preliminary import tariffs on Chinese electric vehicles on July 4.

The world's second-largest economy has struggled to find a solid footing as China's vast property sector, which has failed to respond to a rescue package announced in May, continued to drag on its outlook.

Prices of new homes in China climbed at their slowest pace in five months in June, a private survey showed on Monday.

The Caixin survey showed business owners are facing rising costs driven by higher prices of raw materials such as steel, copper and aluminium and rising freight costs. As a result, the input subindex rose at the fastest pace in two years.

"Insufficient market confidence and effective demand remain key challenges," said Wang Zhe, Senior Economist at Caixin Insight Group.

Manufacturing producers' confidence for the next 12 months hit the lowest point since November 2019, due to concerns over rising competition and uncertainty about the economic outlook.

The industry was still scaling back hiring in June.

"We still see 5% GDP target achievable this year, but it will take time and more policy efforts to heal the wounds and bring back confidence," Citi economists wrote a research note.

Citi expected only incremental measures for the rest of this year, including another round of property-supporting efforts, two additional 10-basis point policy rate cuts and one 50-basis point cut in banks' reserve ratio requirements, and accelerated fiscal deployment without budget revisions or a bond quota expansion.

(Reporting by Liangping Gao and Ryan Woo; Editing by Sam Holmes and Miral Fahmy)