July 1, 2016 / 1:53 AM / 3 years ago

China June factory activity shrinks more than expected to four-month low: Caixin PMI

BEIJING, July 1 (Reuters) - China’s manufacturing activity shrank more than expected in June as a drop in new orders prompted factory owners to cut back production and shed more jobs, a private business survey showed on Friday.

The Caixin/Markit Manufacturing Purchasing Managers’ index (PMI) fell to 48.6 last month, below market expectations of 49.1 and May’s reading of 49.2.

The index has now been below the 50-point neutral level which separates expansion in activity from contraction for 16 straight months, indicating more policy support may be needed to avoid a steeper slowdown in the world’s second-largest economy.

Recent data showed profits at industrial companies grew at a slower pace in May, and state firms’ profits fell at a faster rate, reinforcing the view that conditions are deteriorating.

The outlook for Chinese exporters has been clouded further by Britain’s vote last week to exit the European Union, which Premier Li Keqiang said “increased uncertainties in the global economy”.

Many analysts had expected that signs of improvement in China’s economy in March would continue through the end of the second quarter, but the survey showed manufacturers’ struggles are growing.

“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,” Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, said in a note accompanying the PMI report.

“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.”

Output and new orders fell to the lowest levels since February. Export orders also declined, though at a slightly slower pace from May.

Survey respondents cited poor market conditions and a drop in new work as reasons for lower output.

Employment contracted for the 32nd month in a row as companies cut staffing levels to reduce costs. The pace of job shedding was solid and in line with seen in recent months.

Reporting by Elias Glenn; Editing by Kim Coghill

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