Tariff friction dampens exports with price pressures on rise

The activity of China's manufacturing sector contracted slightly in June as the corporate sector dealt with rising input costs and declining export orders amid escalating trade frictions between the world's top two economies, according to a private survey released on Monday.

The Caixin/Markit manufacturing purchasing managers index dropped to 51 in June from 51.1 in May, but remained above the 50-point mark, which separates growth from contraction, for the 13th consecutive month.

"Overall, the manufacturing PMI survey pointed to strengthening price pressures in June. Deteriorating exports and weak employment, along with companies' destocking and poor capital turnover, put pressure on the manufacturing sector," said Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, in a note accompanying the release of the survey.

The subindex for output rose to 52.1 in June, a four-month high, but that for new export orders contracted for the third straight month, the most in two years. Manufacturers also said in the survey that input prices have risen strongly.

Chinese exporters have faced pressure as China-United States trade disputes worsen, analysts said.

"The escalating trade frictions between China and the US have brought significant uncertainties to prospects for China's exports," said Zhang Ming, an economist at the Institute of World Economics and Politics of the Chinese Academy of Social Sciences.

The falling subindex for new export orders shows that "downside pressure is stronger on external demand than it is on domestic demand", Nomura Securities said in a research note. "Faced with both internal and external challenges, we expect the government to introduce more policy-easing measures and take a more gradual approach in deleveraging."

The overall Caixin manufacturing PMI, however, remained above the 50 mark, in line with the official PMI released by the National Bureau of Statistics.

The official PMI, released on Saturday, slipped to 51.5, down from 51.9 in May. "The manufacturing sector, on the whole, remains on the expansionary track," Zhao Qinghe, a senior NBS official, said in a statement.

The June reading was higher than the average PMI reading of 51.3 in the first half of this year, Zhao said.

The composite PMI, which covers both manufacturing and nonmanufacturing activities, was 54.4 in June, compared with 54.6 in May and 54.1 in the first half of this year.

China's GDP growth was strong in the first quarter, at 6.8 percent year-on-year. In the second quarter, as the country tightened debt and investment controls and refused to loosen regulations on property prices, economic activities lost some steam. The NBS is scheduled to release GDP growth figures for the second quarter on July 16.