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China HSBC PMI slips to nine-month low of 48.2 in June

Employees check on an electricity pylon in Chuzhou, Anhui province, May 1, 2013. REUTERS/China Daily
Employees check on an electricity pylon in Chuzhou, Anhui province, May 1, 2013. REUTERS/China Daily

BEIJING (Reuters) - China's factory activity shrank for a second straight month in June and reached its lowest in nine months as new orders fell despite price cuts by producers, a private survey showed on Monday, reinforcing signs of economic slowdown in the second quarter.

The HSBC/Markit Purchasing Managers' Index (PMI) for June retreated to 48.2, the lowest level since September 2012 and down from May's final reading of 49.2. It was in line with a preliminary reading of 48.3 released on June 20.

A reading below 50 indicates a contraction of activities while one above shows expansion.

"Falling orders and rising inventories added pressure to Chinese manufacturers in June," said Hongbin Qu, China chief economist at HSBC.

In his view, the new quarter will be challenging too.

"The recent cash crunch in the interbank market is likely to slow expansion of off-balance sheet lending, further exacerbating funding conditions for SMEs. As Beijing refrains from using stimulus, the ongoing growth slowdown is likely to continue in the coming months," Qu said.

A separate PMI survey released by the government's statistics office earlier on Monday was less dour. It showed the index slipping to 50.1 in June from 50.8 in May, but still holding above the 50-point threshold that indicates growth.

A sub-index measuring new orders declined to 47.6 in June, a second-month contraction following May's 48.7 and the lowest since October.

New orders from abroad shrank in June for the third month in a row and at a rate that was the fastest since September as foreign clients, particularly those in Europe and the United States, cut demand for Chinese goods even after China's producers passed on savings from lower material costs and discounted charges, HSBC said.

The weakening new orders led to a rising stock of finished goods, for the fourth month in a row in June, with around 11 percent of respondents noting a rise in inventory and only 8 percent signaling a reduction.

The output sub-index contracted in June for the first time since October and factories shed jobs at the quickest pace since August, according to the survey.

On July 15, China is scheduled to release data on economic activities in June and announce how much gross domestic product (GDP) grew in the second quarter. Many investors expect confirmation of their worries that the world's No 2 economy further slowed from January-March's annual pace of 7.7 percent.

Problems stemming from a cash crunch in June could increase worries about the July-September quarter.

But cash rates eased and investors regained confidence about improving credit conditions last week after the central bank said it would ensure policy supported a slowing economy.

Before that, the People's Bank of China let short-term borrowing costs spike to record highs to drive home a message to banks that they could no longer count on cheap cash to fund riskier operations.

(Reporting by Langi Chiang and Koh Gui Qing; Editing by Jason Subler)

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