China’s factory activity in June contracts for the second month

BEIJING (Reuters) – China’s manufacturing industry contracted for a second month in June, an official industrial survey showed on Sunday, keeping alive calls for more stimulus after a series of recent indicators showed the economy struggling to recover.

The official purchasing managers’ index (PMI), at 49.5 in June, remained unchanged in May, below the 50 mark that separates growth from contraction and in line with a median forecast of 49.5 in a poll by Reuters.

The PMI, a sentiment-based indicator, tends to paint a bleaker picture of the world’s second-largest economy than hard data. However, May’s disappointing industrial production numbers suggest that factory owners have some reasons to be concerned.

Although China’s exports exceeded forecasts in May, experts say it remains to be seen whether export sales are sustainable given rising trade tensions between Beijing and Western economies. Meanwhile, a prolonged housing crisis continues to weigh on domestic demand.

As consumers remained cautious and May holiday momentum faded, the PMI for the non-manufacturing sector, which includes services and construction, fell to 50.5 from 51.1 in May, the lowest level since December.

Analysts expect China to implement more policy support measures in the near term, while the government’s pledge to increase fiscal stimulus helps accelerate domestic consumption.

But high local government debt and deflationary pressures cast a long shadow over recovery prospects, despite a series of measures that authorities have implemented since last October, tempering the expectations of investors and factory owners.

Private sector investment grew 0.1% between January and May, compared to 0.3% recorded in just the first four months, while the drop in real estate investment worsened.

China’s central bank last month announced an affordable housing re-lending program to speed up sales of unsold housing stock so that supply better matches demand.

Authorities are under pressure to fire up new growth engines to reduce the economy’s dependence on property.

Premier Li Qiang told a World Economic Forum meeting on Tuesday that the growth of new industries was supporting healthy economic development.

“Since the beginning of this year, China’s economy has maintained an upward trend… and is expected to continue to improve steadily during the second quarter,” Li said.

(Reporting by Joe Cash and Ellen Zhang; Editing by William Mallard)