manufacturing activity shrinks dashing recovery hopes

China’s factory activity in June contracted for a third month, while non-manufacturing activity was at its weakest since Beijing abandoned its strict “zero Covid” policy late last year.

The latest data points to a patchy recovery in the world’s second-largest economy as the growth momentum fizzles.

The official manufacturing purchasing managers’ index (PMI) came in at 49.0 in June — compared to 48.8 in May and 49.2 in April — according to data from the National Bureau of Statistics released on Friday. June’s reading was in line with the median forecast in a Reuters poll.

Friday’s figures also showed China posting its weakest official non-manufacturing PMI reading this year, coming in at 53.2 in June — compared to 54.5 in May and 56.4 in April. A PMI reading above 50 points to an expansion in activity, while a reading below that level suggests a contraction.

“Economic momentum is still quite weak in China. Recent data shows the global economy is slowing, which will likely put further pressure on external demand in the coming months,” said Zhang Zhiwei, Pinpoint Asset Management’s president and chief economist.

“On the other hand, the government’s growth target of 5% this year is quite modest given the low base last year. It is not clear if the weak economic data would push the government to launch aggressive stimulus measures soon,” he added.

The Hang Seng Index and the CSI 300 index reversed losses to rise marginally in early Friday trade after the PMI data was released. The Chinese yuan hit its weakest against the U.S. dollar since mid-November despite the central bank’s stronger-than-expected midpoint fix — the fourth this week as the PBOC seeks to stem weakness in the currency.

Chinese Premier Li Qiang said Tuesday his country was still on track to reach its annual growth target of around 5% — a modest target after China grew just 3% last year, one of the weakest showings in nearly half a century.

Market watchers are anticipating the next steps from a Politburo meeting in July, during which the Communist Party’s top brass will review the country’s economic performance in the first half of the year.

China’s State Council had pledged in mid-June to roll out “more forceful measures” in a timely manner to enhance the momentum of economic development, optimize the economic structure, and promote sustained recovery.

Economic growth in April and May came in below expectations, intensifying calls for more decisive monetary measures to support China’s growth, as a much-anticipated post-Covid rebound disappointed.

Major Wall Street banks — from Goldman Sachs and Bank of America to UBS and Nomura — recently cut their China growth projections.

But a private survey released Friday showed China’s monetary stimulus in August did little to boost loan demand in the second quarter — even though borrowing costs for businesses were lower than a year ago.

It underscores the difficulties faced by the Chinese government face, and throws doubt on whether the latest round of rate cuts in mid-June will be effective.