July 31, 2017 / 1:52 AM / 2 years ago

China July factory growth cools but construction boom fortifies economy

BEIJING (Reuters) - Growth in China’s manufacturing sector cooled slightly in July as foreign demand for Chinese goods slackened, but a government-led infrastructure push kept construction humming and helped prop up the world’s second-largest economy.

The official Purchasing Managers’ Index (PMI) held above the 50-point mark that separates growth from contraction for the 12th straight month, as China poured funds into a construction boom that has fueled demand for everything from cement to steel and other building materials.

But the broad consensus among China watchers is that economic growth will cool in coming months as a government crackdown on financial risks raises borrowing costs for businesses and squeezes profits.

The official PMI stood at 51.4 in July, the National Bureau of Statistics said on Monday, down from the previous month’s 51.7 and a touch below the 51.6 forecast in a Reuters poll.

Export orders, which helped Chinese factories stage a strong recovery in June, had ebbed this month, with manufacturers reporting slackening foreign demand. Overall factory production expanded less quickly compared with June.

New export orders slipped to 50.9 in July from 52.0 in June, helping drag the index for overall factory orders to 52.8 from 53.1.

“The breakdown suggests weaker foreign demand is partly to blame - the new export orders fell by a larger margin than overall new orders,” said Julian Evans-Pritchard, a Singapore-based China economist at Capital Economics.

While China’s foreign trade faces a mostly positive environment in the second half of the year, uncertainties still exist, Vice Commerce Minister Qian Keming said in Beijing on Monday.

The United States and China failed earlier this month to agree on major new steps to reduce the U.S. trade deficit with China, casting doubt over President Donald Trump’s economic and security relations with Beijing.

Domestically, the construction sector remained robust as the government stepped up investment in infrastructure projects. Separate data showed China’s steel sector in rude health, expanding in July at its fastest pace since April 2016.

The PMI reading on the construction sector showed a solid pickup to 62.5 in July from 61.4 in June.

Raw material inventories eased just slightly in July, according to the survey, while imports were almost steady and suggested stable domestic demand.

Activity at large factories gathered steam in July, with the sub-index for big manufacturers rising to 52.9 from 52.7.


A year-long construction boom helped China post stronger-than-expected economic growth of 6.9 percent in the first half of 2017.

But higher bank funding costs seen in the first half will filter through into the real economy eventually, while the red-hot property market moderates after waves of government cooling measures.

The increase in borrowing costs is expected to hit smaller firms harder. Indeed, a reading on medium-sized and small manufacturers showed activity contracted this month.

Growth in the services sector also cooled in July, falling to 54.5 from a three-month high of 54.9 in June, another official NBS survey found.

China’s leaders are counting on growth in services and consumption to rebalance their economic growth model from its heavy reliance on investment and exports.

While the PMI data on Monday hinted at a slowdown, Beijing is still expected to meet its economic growth target of around 6.5 percent for the full year - encouraging news for President Xi Jinping ahead of a major leadership reshuffle in the autumn.

FILE PHOTO: An employee works inside an electronic products factory in Huzhou, Zhejiang province, June 25, 2013. REUTERS/William Hong/File Photo

Markets will now look to the private Caixin/Markit PMI manufacturing survey for July, which focuses more on small and mid-sized firms. It is due to be released on Tuesday.

While economists caution against reading too much into the official PMI figures, which can be volatile, ANZ analysts say the infrastructure boost has more to run.

“The slowdown in July PMIs are only temporary, and we may see a rebound in upcoming months. The continuous ascent in prices suggests to us a longer industrial recovery,” said Betty Rui Wang, ANZ’s senior China economist.

Reporting by Ryan Woo and Elias Glenn; Editing by Kim Coghill & Shri Navaratnam

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