Drop in China’s June manufacturing PMI signals at renewed decline in economic momentum

The Chinese economic momentum is declining again after stabilizing for a brief period of time. The Caixin/Markit manufacturing PMI for the month of June surprisingly dropped to 48.6 in from May’s 49.2. The official PMI was almost unchanged at 50.

Today’s PMI data was quite disappointing and might be an initial sign that the stabilization was temporary and that the structural challenges might weigh on the economy, slowing down growth in the second half of 2016, noted Nordea Bank in a research report.

Meanwhile, it might also imply that the country will not pull back its policy stimuli yet. The deleveraging and reform plan could be delayed if there are risks to the economic growth. The authorities are expected to show interest in capping any upside of the Chinese yuan with the weak growth in sight. Therefore, CNY is likely to depreciate against the USD, added Nordea Bank.

All sub-indices weakened in June. New orders, overseas and domestic, contracted in June. This was however not unexpected. But the output sub-index surprisingly dropped sharply. The aggressive process of destocking was earlier expected to have been positive for restarting production at a later stage, said Nordea Bank.

The rate of deterioration in China’s production sector was the most rapid seen in four months, according to Markit. In order to reduce costs and increase efficiency, businesses cut their staff levels again last month. Employment in the manufacturing sector has declined for 32 consecutive months.

In the mean time, backlogs increased in June, with certain respondents connecting growth to developments of new product. Meanwhile, firms in China have maintained tighter inventory policies, with both pre-production and finished goods stocks declining, although at slower rates than in the previous month.

Today’s data signals that stability in China’s economic growth is coming to an end. The Chinese economy is expected to grow 6.5 percent for the whole of 2016, according to Nordea Bank.