China’s factory activity expected to shrink for third month amid trade tensions: Reuters poll

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BEIJING (Reuters) -China’s factory activity likely shrank for a third straight month in June, a Reuters poll showed on Friday, as manufacturers await a more durable deal in a fragile trade truce with the U.S. to revive shipments to the world’s top consumer market.

A Reuters poll of 17 economists forecast the official purchasing managers’ index (PMI) will come in at 49.7 on Monday, up from May’s 49.5 but still below the 50-point threshold that separates growth from contraction in activity.

With domestic demand still sluggish, dragged down by a prolonged property crisis that is squeezing household spending and exacerbating deflationary pressures, factory owners lack compelling alternatives to sitting on inventory and waiting to see if Beijing can strike deals to ease trade tensions with the United States and European Union, analysts say.

But authorities cannot afford for China’s vast manufacturing sector to stagnate or shrink, if its ambitious 2025 growth target of “around 5%” is to be met.

Profits at China’s industrial firms swung sharply back into decline in May, dropping by an annual 9.1%, separate National Bureau of Statistics data showed on Friday, which officials attributed to weak demand and falling industrial product prices.

Policymakers are confident they can push ahead with reforms launched late last year to transition the world’s second-largest economy from a manufacturing-led model to a consumer-driven one, Premier Li Qiang told delegates at World Economic Forum and Asian Infrastructure Investment Bank meetings this week.

Such a shift in the engines of growth, which economists say is crucial to securing China’s future, could be progressed while maintaining strong growth, Li said.

But economists warn the transition could take years, and that reform typically comes at the cost of a more subdued economy in the short term.

While the U.S. and China have settled on a framework trade deal, analysts expect eventual U.S. tariffs to remain well above historic levels, maintaining pressure on exporters and officials to find alternative markets or boost domestic demand.

Analysts polled by Reuters forecast the private sector Caixin PMI at 49.0, up from 48.3 a month prior. The data will be released on July 1.

(Reporting by Joe Cash; Polling by Vijayalakshmi Srinivasan and Veronica Khongwir in BengaluruEditing by Shri Navaratnam)