China's manufacturing activity shrinks for third consecutive month
What's the story
China's manufacturing sector has contracted for the third consecutive month in June, according to a recent survey. The official purchasing managers' index (PMI) rose slightly to 49.7 in June from May's 49.5, but remained below the neutral mark of 50 that separates growth from contraction. This indicates that businesses are still battling weak domestic demand and sluggish sales in overseas markets amid a fragile trade truce with the US.
Market trends
Some sub-indices show signs of improvement
Despite the overall contraction, some sub-indices showed signs of improvement. The new orders sub-index rose to 50.2 in June from May's 49.8, while the new export orders sub-index improved slightly to 47.7 from 47.5. These changes suggest that there may be a slight uptick in demand for Chinese goods both domestically and internationally, even as the overall manufacturing sector continues to contract.
Economic impact
China's industrial firms' profits swing back into decline
China's industrial firms saw their profits swing back into decline in May, with an annual drop of 9.1%. The National Bureau of Statistics attributed this decline to weak demand and falling industrial product prices. While the manufacturing sector is struggling with weak demand and deflationary pressures, the non-manufacturing PMI, which covers services and construction, showed growth. It rose to 50.5 in June from May's 50.3.
Policy outlook
Policymakers optimistic about transitioning economy to consumer-driven model
Despite these challenges, policymakers are optimistic about pushing forward with reforms initiated late last year. Premier Li Qiang told delegates at the World Economic Forum and Asian Infrastructure Investment Bank meetings that they can transition the world's second-largest economy from a manufacturing-led model to a consumer-driven one. However, economists warn this shift could take years and may lead to a subdued economy in the short term.