China factory activity picks up in June despite global headwinds

China’s factory activity picked up pace in June, official data showed on Tuesday, although analysts warned weak global demand and a potential coronavirus resurgence are weighing on its longer-term recovery.

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

But economists caution that momentum may weaken in the second half of 2020 as key markets struggle to recover from the crisis 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 forecast in a Bloomberg News poll of analysts and up 0.3 points from May.

Anything above 50 is considered to show expansion.

The non-manufacturing PMI came in at 54.4 points from 53.6, according to the National Bureau of Statistics (NBS).

The readings will be welcomed as the economy slowly emerges from the disease, having shrunk in the first quarter for the first time in decades.

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

Meanwhile, China’s central bank will cut the re-discount and re-lending rates by 25 basis points as of July 1, two sources with direct knowledge told Reuters on Tuesday, in a move that will reduce funding costs for smaller firms and rural sectors.

The Securities Times first reported the rate cuts.

The three-month relending rate for small firms and rural sectors will be cut to 1.95% while the six-month rate will be cut to 2.15% and the one-year rate will cut to 2.25%, the government-backed newspaper reported.

The rediscount rate will be cut by 0.25 percentage point to 2%, it said.

The central bank will also cut the re-lending rate related to financial stability by 50 basis points, it added.

Separately, Britain’s economy has suffered its biggest quarterly contraction for more than 40 years as the coronavirus pandemic slashed activity, revised official data showed on Tuesday.

Gross domestic product shrank 2.2 per cent in the first quarter, or January-March period, compared with the prior three months, the Office for National Statistics said in a statement giving a second estimate.

The initial figure given by the ONS showed a GDP contraction of 2.0 per cent in the first quarter, or worst reading since the global financial crisis in 2008.

Second-quarter data will show the full impact of coronavirus because Britain’s nationwide coronavirus lockdown was only imposed on March 23.

Recent official figures had showed UK economic activity crashed by a record 20.4 percent in April.

“Our more detailed picture of the economy in the first quarter showed... the largest quarterly fall since (the third quarter of) 1979,” said ONS deputy national statistician Jonathan Athow.

“All main sectors of the economy shrank significantly in March as the effects of the pandemic hit.”

Athow added however that “the sharp fall in consumer spending at the end of March led to a notable increase in households’ savings”.

This has been helped further by the government paying the bulk of private-sector workers’ wages during the pandemic to keep them in jobs.

Economists meanwhile anticipate a double-digit slump in output during the second quarter or April-June period, placing Britain in a technical recession.

The Bank of England has warned that COVID-19 paralysis could spark the nation’s worst recession in centuries, after the coronavirus slammed economies worldwide.

Earlier this month, the BoE unveiled an extra £100 billion ($126 billion, 112 billion euros) of cash stimulus to prop up Britain’s coronavirus-hit economy.

It had already reacted by slashing its main interest rate to a record-low 0.1 percent and pumping £200 billion into the economy to get retail banks lending to fragile businesses. European stock markets dipped on Tuesday on stubborn coronavirus fears, with London hit by a worse-than-expected UK growth contraction and gloomy corporate news from energy major Royal Dutch Shell.

London fell 0.5 per cent with sentiment dented also after officials reimposed lockdown measures in the central English city of Leicester. In the eurozone, Madrid and Milan each fell 0.3 per cent, while Paris flatlined and Frankfurt gained 0.3 per cent.

The British capital’s FTSE 100 index dropped after Shell unexpectedly warned it would take a vast charge of up to $22 billion owing to the recent oil price collapse caused by crashing demand.

The news sent Shell’s ‘A’ share price tumbling 2.5 per cent to 1,305.5 pence in London, while rival BP STOCK shed 1.7 per cent to 309.50 pence.

The Dow Jones Industrial Average was up 69 points, or 0.3%, at 25,664, as of 10:53am. Eastern time, and the Nasdaq composite was up 0.9%. Most STOCKs in the S&P 500 were higher, led by big gains for technology hardware companies.

Agencies