Manufacturing contracts slightly
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Manufacturing contracts slightly

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Consumer goods buck trend as only category to see production growth

China's manufacturing sector contracted slightly in June according to the latest purchasing managers indexes, but factory activity may pick up later given the indexes' structural improvements and potential policies to boost consumption, analysts said on Monday.

The manufacturing Caixin/Markit PMI, released on Monday, slid to a five-month low of 49.4 in June, down from 50.2 in May and below the 50-mark that divides expansion from contraction.

The official manufacturing PMI reading for June also came in at 49.4, unchanged from May, the National Bureau of Statistics said on Sunday.

"Overall, China's economy came under further pressure in June," said Zhong Zhengsheng, director of macroeconomic analysis at CEBM Group, a subsidiary of Caixin.

Demand weakened and production lowered as trade tensions put a strain on business confidence, Zhong said, citing that the gauges for new domestic orders, new export orders and output declined into contraction territory in June.

"It's crucial for policymakers to step up countercyclical policies. New types of infrastructure, high-tech manufacturing and consumption are likely to be the main policy focuses," Zhong added.

Despite the overall weakening in Caixin PMI data, consumer goods bucked the trend and became the only category to record production growth in June.

The NBS figures also showed that consumption kept strengthening its role as the new growth engine, with the gauge of consumer goods production up month-on-month to 52.2 in June, outpacing manufacturing production as a whole by 0.9 percentage point.

"With the drive from individual income tax and value-added tax cuts, consumer goods demand represented by retail sales is expected to pick up continuously in the second half of the year," said a report from Shenwan Hongyuan Securities on Monday.

Rallying consumption, in tandem with steadily recovering infrastructure investment, could help shore up manufacturing demand and revitalize production, the report said.

In May, retail sales increased by 8.6 percent year-on-year, up from 7.2 percent a month earlier, according to the NBS.

Cheng Shi, chief economist with ICBC International, agreed that consumption may moderately quicken in the second half and cement growth, as more policies to unleash consumption potential may be on the horizon.

Cheng exemplified that infrastructure investment may focus on improving consumption infrastructure in lower-tier cities and county areas, and subsidies for vehicle and home appliance consumption can also be expected.

Besides a robust production of consumer goods, structural improvements in official PMI data may also signal a stronger economy in the second half of this year, said Zhu Jianfang, chief economist with CITIC Securities.

The improvements in the sub-indexes of raw material inventories and delivery time indicated that enterprises actively prepared for production in June, while the operating conditions of mid-and small-sized enterprises, who are sensitive to changes in the economic climate, recovered in June, Zhu said in a report.

The PMI of medium-sized enterprises increased by 0.3 percentage point to 49.1 last month, and that of small businesses rose 0.5 percentage point to 48.3, according to the NBS.