China manufacturing sector weakens but services show improvement

Data out of China on Friday showed the manufacturing sector weakened in June, but the services sector improved.

The Caixin manufacturing purchasing managers' index, a private gauge of factory activity, dropped for the third month in a row to 48.6 in June from 49.2 in May, missing expectations for it to remain unchanged. A reading below 50 indicates contraction.

China’s official manufacturing PMI fell to 50.0 in June from 50.1 the previous month, in line with consensus expectations.

Nomura, which had been expecting a reading of 49.9, said the modest fall in the headline masked significant divergences among enterprises.

“The PMI for large-sized enterprises rose by 0.7 percentage points (pp) to 51.0 in June. On the other hand, the PMIs for medium- and small-sized enterprises fell more sharply by 1.4pp and 1.2pp, respectively, to 49.1 and 47.4, both below the expansion/contraction threshold of 50,” it said.

A sub-index of new orders fell to 50.5 from 50.7, while the production sub-index rose to 52.5 from 52.3.

Meanwhile, data from the National Bureau of Statistics showed China’s official non-manufacturing PMI, which covers services such as retail and real estate, improved to 53.7 from 53.1 in May.

The services sub-index edged up to 52.2 from 52 in May, while the construction sub-index jumped to 62.0 from 59.4.

Nomura said: “Overall, the lower official PMI, together with the Caixin PMI released today… add a bearish bent to the mixed messages from other June leading indicators (the Minxin PMI fell while the MNI business sentiment index rose). Nomura’s China growth pulse table shows that more June indicators declined than rose, which supports our view that growth momentum is losing steam.”

Capital Economics said: “The manufacturing PMIs continue to disappoint. But given the recent resilience of the service sector and signs of strength in construction, we still aren’t overly concerned about the near-term outlook for China’s economy.”