China factory growth seen cooling slightly in June, trade war a worry

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BEIJING (June 28): Growth in China's manufacturing sector is expected to have cooled only slightly in June after a surprise pickup in May, which along with strong industrial profits last month should help allay concerns of a sharp economic slowdown.

All the same, the country's massive factory sector could soon be facing significant new challenges as the latest tariffs in an escalating trade dispute between China and the United States are set to take effect on July 6.

The official manufacturing Purchasing Managers' Index (PMI) is seen slipping to 51.6 in June from 51.9 in May, according to the median forecast of 25 economists in a Reuters poll. The 50-mark divides expansion from contraction on a monthly basis.

That would mark nearly two years of expansion for China's manufacturing sector, which has benefited from a housing boom, strong global demand for Chinese exports, and a rebound in commodity prices.

There is little doubt though about the rising risks to the outlook, with economic growth in May weakening as credit expansion slows and domestic demand ranging from government-funded infrastructure investment to consumer spending looks to be softening.

The slowdown comes just as US President Donald Trump pushes ahead with tariffs on US$50 billion of Chinese imports, with threats for up to US$400 billion more that has policy makers and investors worried about the broader economic impact of the bitter trade fight.

For now, the industrial sector has shown few signs of stress, with profits rising 21% in May as ex-factory price inflation has remained solid.

But Beijing isn't sitting still and has stepped in with measures to support growth even as it extends a campaign to tamp down on financial risks and reduce debt across the broader economy.

The deleveraging effort has driven up borrowing costs for businesses and slowed the economy, and the fear is that any turmoil in China's markets could restrict Beijing's ability to pump-prime the economy as it tries to mount a defence in the trade battle with Washington.

The People's Bank of China on Sunday freed up more funds for lending by cutting required reserve levels for banks, with the policy set to become effective on July 5, one day before the tariffs take effect.

Separately, a private survey on China's factory activity is forecast to show a similar mild easing trend.

The private Caixin/Markit Manufacturing Purchasing Managers' index (PMI) is expected to have fallen slightly to 51.0 in June versus 51.1 in May.

The official PMI survey is due out on Saturday, along with a similar official survey on services.

The private Caixin manufacturing PMI will be published on July 2, and the Caixin services PMI on July 4.