ACTIVITY in China’s manufacturing sector eased unexpectedly in July as orders cooled and flooding disrupted business, an official survey showed, adding to fears the economy will slow in coming months unless the government steps up a huge spending spree.

    While a similar private survey showed business picked up for the first time in 17 months, the increase was only slight and the much larger official survey yesterday suggested China’s overall industrial activity remains sluggish at best.

    Both surveys showed persistently weak demand at home and abroad were forcing companies to continue to shed jobs, even as the government vows to shut more industrial overcapacity that could lead to larger layoffs.

    And other readings yesterday pointed to signs of cooling in both the construction industry and real estate, which were key drivers behind better-than-expected economic growth in the second quarter.

    The official Purchasing Managers’ Index (PMI) eased to 49.9 in July from the previous month’s 50.0 and below the 50-point mark that separates growth from contraction on a monthly basis.

    While the July reading showed only a slight loss of momentum, Nomura’s chief China economist Yang Zhao said it may be a sign that the impact of stimulus measures earlier this year may already be wearing off.

    That has created a dilemma for the government as the Communist Party seeks to deliver on official targets, even as concerns grow about the risks of prolonged, debt-fuelled stimulus.

    “The government has realized the downward pressure is great but they’ve also realized that stimulus to stimulate the economy continuously is not a good idea and they want to continue to focus on reform and deleveraging,” Zhao said.

    Heavy flooding, particularly along the Yangtze River, contributed to July’s manufacturing contraction along with slowing demand and the cutting of overcapacity in some industries, the statistics bureau said.

    Falling activity at smaller firms also was a key reason for July’s poor figure, the statistics bureau said, but performance at larger companies improved, in a sign that the government is becoming more reliant on big State firms to generate growth.

    While many analysts believe China may be slowly stabilizing, conditions still look patchy.

    Industrial profits rose at the fastest pace in three months in June, but gains were concentrated in just a few industries including electronics, steel and oil processing.

    Spurred by rebounding prices and stronger construction demand, China’s steel output and exports have been near record levels. But it is one of the key sectors being targeted by officials for capacity cuts and tougher pollution controls.

    Indeed, the PMI showed factory output in July still expanded solidly, though the pace cooled to 52.1 from 52.5 in June.

    A private PMI survey by Caixin/Markit was more mixed.

    Its 50.6 reading was stronger than expected and the first expansion since February 2015, sparking hopes that some of the government’s stimulus was starting to trickle down to smaller private firms which have been under greater stress than larger State-backed enterprises.

    But overall order growth was modest and export orders continued to fall.

    The Caixin report tends to give more weight to light industry, whereas the official survey is skewed more toward heavy industries, said Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, according to Caixin.

    An official survey on the services sector was more upbeat, showing growth accelerated to 53.9 in July from 53.7 in June.

    (SD-Agencies)