PEKING (Reuters) – Chinese manufacturing growth slowed in June following a better-than-expected performance in May, according to official data, as escalating trade tensions with the US raise concerns about a slowdown in the world's second largest Economy.
China's economy has already felt the plight of a multi-year crackdown on risk takers, which has boosted companies' borrowing costs by encouraging the central bank to divert more money by cutting lender reserve requirements.
The PMI, which was released on Saturday, dropped to 51.5 in June, below analyst estimates of 51.6 and 51.9 in May, but remained well above the 50-point mark, the growth of contraction separates 23rd straight month.
The results are in line with recent data, including credit growth, investment and retail sales, which indicate a slowdown in Chinese economy growth as policymakers steer debt risk and a heated trade chain with the United States.
Significantly, the index of new export orders fell in June for the first time since February, falling from 51.2 in May to 49.8.
A production sub-index fell from 54.1 in May to 53.6 in June, while the subindex for new orders declined from 53.8 to 53.2.
The PMI for large companies fell from 53.1 in May to 52.9 in June, the index for mid-sized companies fell from 51.0 to 49.9, while the index for small businesses dropped from 49.6 to 49, 8 increase.
"Domestic demand is weakening and external demand is under pressure from the escalating trade friction between China and the US," said Wen Bin, chief economist at Minsheng Bank in Beijing.
Wen said he expects the central bank to further reduce banks' reserve ratios (RRRs) in the coming months to counteract a stronger economic slowdown.
The central bank said on June 24 that it would lower the RRR by 50 basis points for some banks in order to accelerate the pace of debt-to-equity swaps and encourage lending to smaller companies.
With the official PMI for manufacturing reaching an eight-month high in May, there was growing evidence that China's economy was slowing down.
Credit growth has slowed this year as the government erodes many types of loans, and the tighter liquidity environment appears to be impacting growth.
On July 16, the government will publish GDP growth data for the second quarter and other key indicators.
ANZ analysts forecast growth of 6.7 percent for the second quarter, down from 6.8 percent in the first quarter.
In May, industrial production, retail sales, and fixed asset investment fell short of expectations as car sales declined and local governments slashed construction while inquiring about their loans from Beijing.
While the economy could overcome these internal challenges without dramatically slowing growth, the US trade dispute is compounding uncertainty over how China's economy will respond.
With US President Donald Trump increasing pressure on China with the threat of new tariffs and investment restrictions, China's stock markets and currency suffered one of the worst months since June.
MARKET LOSSES IN JUNE
After a continued sell off, the Chinese yuan and stock markets rebounded somewhat on Friday, but investors struggled with some of their worst losses in years when a fierce trade chain between China and the US threatened to clash the country.
The United States has threatened to impose tariffs on Chinese imports of up to $ 450 billion, with the first $ 34 billion coming into force on July 6.
China's exports have held up relatively well this year, with shipments rising 12.6 percent in dollars in May.
But the decline in new export orders in June could point to tougher times for exports.
A sister survey showed that Chinese service sector growth picked up slightly in June. The PMI for the non-manufacturing sector rose to 55.0 from 54.9 in the previous month.
An undervalued construction activity, a key growth driver for 2017, was 60.7 in June, down from 60.1 in May.
Chinese policymakers expect service and consumption growth to rebalance their economic growth model from their heavy reliance on investment and exports. The services sector today accounts for more than half of the economy, and rising wages are giving more influence to Chinese consumers.
The manufacturing and services manufacturing PMI dropped to 54.4 points in May (May 54.6).
Additional coverage by Xu Jing; Arrangement by Richard Borsuk