China factory activity picks up in June despite global headwinds

The world’s second-largest economy has been whirring back to life after the virus and sweeping lockdowns prompted a near-halt in activity.

But economists caution momentum may weaken in the second half of 2020 on weaker demand and as orders for medical supplies abroad — which have boosted exports — peak and fall.

China’s Purchasing Managers’ Index (PMI), a key gauge of activity in factories, came in at 50.9 points in June, better than the 50.5 a Bloomberg poll of analysts expected.

This was also an improvement from 50.6 in May and remained above the 50-point mark separating growth from contraction every month.

Non-manufacturing PMI was 54.4 points, up from 53.6 in May, according to the National Bureau of Statistics (NBS).

Senior statistician Zhao Qinghe noted that the surprise uptick came as “supply and demand continued to pick up” in June, while imports and exports are also looking better as major global markets restart their economies.

But Zhao warned that there were still “uncertainties”, with the import and export indexes still below the 50-mark and a larger number of smaller enterprises reporting a lack of orders.

Nomura analysts said in a recent report that uncertainty is “increasing” for the second half, with pent-up demand from earlier this year fading out and the slump in new export orders finally hitting production volumes.

With the COVID-19 pandemic “far from over” and China’s capital Beijing reimposing some lockdowns to contain new infections, Nomura said social distancing measures “are likely to extend well into the second half of the year”.

“Rising US-China tensions could also hit China’s exports and export-related manufacturing investment,” they added.

Although China and the US signed a partial trade deal in January, marking a truce in their bruising trade war, tensions have escalated again as they trade barbs over the origin of the virus and on other fronts.