China factory sector seen maintaining solid growth in July

BEIJING (Reuters) - Activity in China’s factory sector is expected to have grown again in July, with only a slight slowdown from June’s three-month high suggesting momentum in the economy remains strong despite a tighter policy environment.

FILE PHOTO: A worker installs rubber onto the windows of the doors along a production line at a truck factory of Anhui Jianghuai Automobile Co. Ltd (JAC Motors) in Hefei, Anhui province May 5, 2014. REUTERS/Stringer/File Photo

Analysts and government think tanks expect the economy to slow in the second half of the year as higher borrowing costs and a cooling property market begin to weigh.

But the broad consensus among China watchers is that any slowdown would likely be modest and avoid a sharper deceleration given steady domestic demand and rising exports, which likely helped the vast factory sector expand for the twelfth straight month in July.

The government-affiliated Chinese Academy of Social Sciences (CASS) this week predicted China’s third quarter gross domestic product growth will be 6.8 percent thanks to a steady expansion in consumption and investment.

The official manufacturing Purchasing Managers’ Index (PMI) is expected at 51.6 for July, only slightly lower from June’s 51.7 reading, according to a median forecast of 26 economists polled by Reuters.

They predict the private Caixin/Markit Manufacturing Purchasing Managers’ index (PMI) will be unchanged in July from 50.4 in June, when it rebounded after contracting the previous month.

The official PMI survey will be published on July 31, along with a similar survey covering the services sector, while the Caixin PMI is set to be released on Aug. 1.

China’s economy grew a faster-than-expected 6.9 percent in the second quarter, matching the first quarter’s pace, supported by solid exports, industrial production and consumption.

That has given policymakers room to tackle financial risks stemming from a rapid build-up in debt and a property market bubble, which economists expect to drag on growth later this year.

Policymakers have already launched a flurry of regulatory measures early this year and moved up short term borrowing costs.

All the same, a recent run of data has yet to point to any slowdown, with industrial profit numbers published Thursday showing corporate earnings picked up in June as strong demand offset higher borrowing costs.

It remains to be seen how policymakers will react if growth does cool as expected, as well as how new policy directives that come out of an autumn congress of the Communist Party will impact the economy.

“My hunch is that (policymakers) might be more comfortable with slower growth, but there are still a lot of uncertainties there,” said Yang Zhao, chief China economist at Nomura in Hong Kong, who added that it’s too early to judge what any policy response might be.

Zhao believes policy will remain neutral next year, even though he expects the People’s Bank of China to cut banks’ required reserve ratio twice.

Reporting by Elias Glenn; Editing by Shri Navaratnam