The Caixin China general manufacturing purchasing managers index fell to 51.3 in June from 52 in May as growth in both production and new orders softened, according to Caixin Insight Group and IHS Markit Thursday.
The result was below market estimates of 51.8 and was the lowest reading in three months as a result of the increase in local Covid cases and supply chain difficulties.
"Output rose the least since March 2020, new order growth eased to a three-month low and export sales were broadly stagnated. Meanwhile, the rate of job creation was the second-strongest since January 2013; while backlogs of work rose for the fourth month in a row. On the price front, inflationary pressures eased, with input prices rising the least in seven months while selling prices increasing at the slowest pace since February," the survey said.
"Finally, the degree of optimism was unchanged from May's four-month low. In the second half of this year, the low base effect from last year will weaken. Inflationary pressure is still a serious challenge for China," said Wang Zhe, senior economist at Caixin.
"Companies indicated that the recent uptick in Covid-19 cases and supply chain difficulties weighed on output, while the pandemic dampened demand both at home and abroad," the report said.
"Still, the increase in new orders led goods producers to add to their staff in June, as the measure for employment rose from the previous month. The gauge for backlogs of work fell to a four-month low, though it remained in expansionary territory.
"Manufacturers maintained a positive outlook for their businesses for the next 12 months, though the indicator for future output expectations remained unchanged from May's four-month low. Their confidence was driven by expectations that the global economy will pull through the pandemic," according to the survey.
Earlier this week, China's official manufacturing purchasing managers index from the National Bureau of Statistics fell to 50.9 in June from 51 the previous month. The official PMI polls a larger proportion of big companies and state-owned enterprises.
Economists with Nomura International (Hong Kong) Ltd. expect the official manufacturing purchasing managers index to bounce back to 51.2 in July, as they anticipate a release of pent-up demand once China gets its latest Covid-19 flare-up under control.
"Still, the economists said the sector would likely come under increased pressure in the second half of this year once that demand fades. Exports are also expected to weaken as developed markets shift back to services consumption as they reopen. Also, they predicted that surging raw materials prices will suppress demand in the sector," Caixin reported Thursday.
Wang said inflation was a serious challenge to China. China's producer price index, which gauges changes in prices of goods circulated among manufacturers and mining companies, rose at the fastest pace in almost 13 years in May. A banking regulatory official expected the purchasing managers index to rise another 10% year on year in June.
Nomura said it was unlikely that China would tighten monetary and credit policies even though it has grown increasingly concerned about rising commodity prices. Instead, officials will boost supplies and relax carbon emission reduction measures, it said.
"Despite still difficult supply conditions, there are signs that price pressures have eased abruptly. After reaching its highest since early 2011 in May, the price components of the PMIs dropped back sharply in June and point to the slowest month-over-month rises in producer prices in eight months.
"Meanwhile, there are signs that demand is levelling off. Both the new orders and export orders components of the PMIs dropped back last month. The latter is now under 50 which suggests that foreign demand for manufactured goods is tailing off. This is in line with our view that the recent boom in exports will unwind over the coming quarters as global consumption patterns normalizes on the back of vaccination rollouts," Capital Economics senior China economist Julian Evans-Pritchard said Thursday.
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