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Report: China Factory Activity Still Weak but Stabilizing

Manufacturing conditions at China’s factories are still weak as activity contracted in June for the fourth straight month signaling signs of continued malaise the manufacturing sector in the world’s second largest economy has been facing since 2011.

HSBC’s Flash China Manufacturing Purchasing Manager’s Index (PMI), compiled by financial information service firm Markit, rose to a three-month high of 49.6, which still indicates contraction, only the decline is the smallest since March. The index is based on a 100-point scale, with sub 50 numbers denoting contraction.

“On the one hand, the sector shows signs of improvement as output stabilized amid a slight pick up in total new work, while purchasing activity also rose slightly over the month,” Markit economist Annabel Fiddes said. “On the other hand, manufacturers continued to cut their staff numbers, with the latest reduction the sharpest in over six years. This suggests that companies have relatively muted growth expectations as demand conditions both at home and abroad remain relatively subdued.”

Export orders remained flat through the month after registering the largest monthly decline in nearly two years in May.

Factory prices fell at a faster rate than last month as companies said they needed to compete on price to bring in new business. Input costs are still falling but the rate of decline has eased, likely owing to fewer deflationary pressures in the manufacturing supply chain, the report noted.

The results point to slowed second quarter momentum for Chinese manufacturing, and according to Fiddes, “suggests the authorities may step up their efforts to stimulate growth and job creation in the second half of the year.”

China’s economic growth slowed to 7 percent in the first three months of 2015 and June’s PMI raises the possibility of the its economic growth having slowed further than that. The government’s target of expanding the economy 7 percent in 2015—which itself would be the weakest growth China has seen in a quarter century, according to Markit—is looking increasingly out of reach.