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The growth in China’s factory sector is anticipated to have slowed down for the second month in July with softer domestic demands and as the trade tensions with the United States appear far from being resolved, blurring the outlook for external demand.

The sluggish growth in July is expected to be slight, on the other hand.  There were healthy profit margins pushed by strong commodities prices as well as efforts to limit excess production capacity, which indicates that firms are rooting for keeping their factories up and about.

The official manufacturing Purchasing Manager’s Index (PMI) is expected to drop to 51.3 in July from 51.5 in June based on the average forecast from 28 economists who were surveyed.  The 50 mark divides expansion from contraction on a monthly to month basis.

This would mark the two years of expansion for China’s manufacturing sector, coming in after a recovery in worldwide demand for Chinese exports and strong credit growth.  The strong credit growth, on the sidelines, pushed for a strong housing boom.

On the flip side, both of these growth drivers have also slowed this year.  Export growth pulls back while the government reins in credit expansion in an attempt to place the economy on a more sustainable growth path.

This event has raised concerns that the sluggishness in growth could be bigger than expected during the second half of the year, since exports to the United States, which is China’s biggest export market, face steeper tariffs.

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The trade tensions that lurk between the United States and China quickly escalated in July as the world’s two largest economies formally imposed new tariffs on each other’s goods with threats of more such tariffs slaps to come.

China’s economic growth slowed a bit to 6.7 percent in the second quarter.  However, this was still above the official 2018 growth target of around 6.5 percent.

Meanwhile, the industrial sector has held its ground so far, with profits increasing 20 percent in May on strong ex-factory price inflation.

Beijing, on the other hand, is not idling and has intervened with measures to spur growth since a steeper slowdown could spark job losses, which is a concern that a government official has raised this week.

China is set to bolster spending on infrastructure projects over the remaining part of the year and ease borrowing curbs on local governments to support growth.

“This round of fiscal stimulus should be more contained compared to previous rounds given already high macro leverage and already high property prices,” said Lisheng Wang, who is an economist at Nomura in Hong Kong.

Wang stated that he believes in a more visible slowdown in China’s economy during the third quarter before some policy-driven stabilization during the fourth quarter.

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