China Factory Activity Loses Momentum, Signaling Possible Economic Slowdown -- Update

A gauge of China's manufacturing activity fell more than expected in July, offering a sign of an anticipated slowdown in the world's second-largest economy after a strong start to the year.

China's official manufacturing purchasing-managers' index fell to 51.4 in July from 51.7 in June, according to data released by the National Bureau of Statistics on Monday. The July reading fell below a median forecast of 51.6 from a Wall Street Journal poll of economists, but still remained above the 50 mark that separates expansion from contraction, as it has for 12 months straight.

The downtick in manufacturing was seen by some economists as the first and expected sign that the economy is slowing after the government began to try to rein in a hot property market and rising corporate debt.

"The latest official PMI readings suggest that China's growth momentum may have waned at the start of the third quarter," said Julian Evans-Pritchard, an economist with Capital Economics.

China achieved a 6.9% growth rate in the first half of the year, a pace seen as higher than expected by some economists and that gives Beijing a comfortable margin to continue the deleveraging effort, meet the 6.5% growth target for this year and maintain stability ahead of a the leadership reshuffling later this year.

Zhao Qinghe, an economist with China's statistics bureau, attributed July's drop in the official manufacturing PMI chiefly to weaker foreign demand and slower production amid hot weather and floods in southern China.

Moving into the second half of the year, some economists have predicted a deceleration in the economy as rising financing costs and some cooling in the real-estate market weigh on growth.

A possible slowdown in the broader economy was also reflected in the decline of nonmanufacturing PMI. The index fell to 54.5 in July from 54.9 in June, as transportation and property sectors softened. Growth in construction was a bright spot, with the sector's subindex rising to its highest level since December 2013 due to government-backed infrastructure spending.

The tug of war between maintaining growth and deleveraging will continue to play out for the rest of the year, economists said, and the improved growth in the first half enables Beijing to prioritize its focus on financial regulation.

The Chinese economy has been heavily dependent on borrowed money and government-led investment. Government officials and economists both have said the debt-fueled growth model is hard to sustain and has left the economy increasingly overleveraged while delivering a diminished impact on growth.

High-level government meetings--including a once-in-five-years financial work conference last month--have placed the priority on curbing the rapid buildup of debt, especially debt levels at state-owned enterprises.

"We anticipate further weakness ahead as the crackdown on financial risks weighs on credit expansion and economic growth," said Mr. Evans-Pritchard.

Grace Zhu

(END) Dow Jones Newswires

July 31, 2017 00:07 ET (04:07 GMT)