Beijing, July 1

Activity in Chinese factories suffered its sharpest deterioration for four months in June, figures showed today, as weak demand and industrial overcapacity weighed on the world’s second-largest economy.

The figures are the latest to highlight a long-running growth slowdown in country as the global outlook weakens.

The private Caixin Purchasing Mangers’ Index of manufacturing activity came in at 48.6 in June, down from 49.2 in May, the Chinese financial magazine said in a statement with data compiler Markit. It was also well off the median forecast of 49.2 in a Bloomberg News poll.

A reading above 50 signals expanding activity, while anything below indicates shrinkage.

Investors watch the figure closely as the first available indicator each month of the health of the economy.

Manufacturers shed jobs for the 32nd straight month, Caixin said, as they sought to cut costs in the face of a drop in new work. Overall economic conditions in the second quarter were ‘considerably weaker’ than in the first quarter, Caixin’s Zhong Zhengsheng said.

“Against the backdrop of a turbulent external environment, and in order to avert a sharp economic decline, the government must strengthen its proactive fiscal policy while continuing to follow prudent monetary policy.”

China is a vital driver of global expansion, but its economy grew only 6.9 per cent last year, its weakest rate in a quarter of a century. The key manufacturing sector has been struggling for months in the face of sagging global demand for Chinese products and excess industrial capacity left over from the country’s infrastructure boom.

But the official Purchasing Manager’s Index (PMI) which focuses on larger firms than the Caixin survey painted a slightly more positive picture, with data for June coming in at the breakeven point of 50, according to the National Bureau of Statistics (NBS).

The figure was slightly down from the previous two months, but matched economists’ median expectations of 50 in a survey by Bloomberg News.

“It is noteworthy that the current domestic market demand remained weak and real economy momentum was still insufficient,” Zhao Qinge, analyst for the NBS, said in a note.

Some traditional industries dropped significantly, the NBS said, as the index for activity in highly energy-intensive factories fell 0.9 points to 48.2.