China factory activity likely to return to expansionary territory in June

BEIJING Reuters -- China's factory activity likely expanded for the first time in four months in June, due to a faster recovery in production and an easing of supply chain snags as manufacturing hubs emerged from lock-ins, a Reuters poll showed on Wednesday.

The official manufacturing Purchasing Manager's Index PMI is expected to rise to 50.5 in June -- the highest level in a year -- from 49.6 the previous month, returning to expansionary territory for the first time since February, according to the median forecast of 30 economists polled by Reuters.

A reading above 50 indicates expansion from the previous month, below 50 means contraction.

An expansion of factory activity after three months of contraction shows that the world's second-largest economy is going to take a path out of the supply-side shocks from COVID 19 and could ease downward pressure on the yuan, which has shed 5% against the U.S. dollar this year.

The key drivers of the resumption of production would be an easing of COVID curbs and possibly higher demand for upstream production with a stronger boost to infrastructure, analysts at Morgan Stanley said in a note.

The commercial hub of Shanghai, located at the heart of the Yangtze River Delta, ended a city-wide lock down on June 1, allowing more small factories in the region to resume production.

Although activity in China is gaining momentum due to the lengthy COVID lock down in April and May, headwinds, including a still subdued property market, soft consumer spending and fear of any recurring waves of infections, persist.

In order to keep pace with growth and control unemployment in a politically sensitive year, the State Council recently announced a broad package of economic support measures. President Xi Jinping is poised to secure his third term in the 20th Party Congress this fall.

Analysts say that the official GDP target of around 5.5% for this year will be hard to achieve without abandoning the zero-COVID strategy.

Premier Li Keqiang vowed to achieve moderate economic growth in the second quarter, although some private sector economists believe that the economy will shrink in the April-June quarter from a year earlier, compared to the first quarter's 4.8% growth.

The PMI, which focuses on big and state-owned firms, and its sister survey for the services sector, will be released on Thursday.

The PMI of the private sector of Caixin manufacturing focuses more on small firms and coastal regions. Analysts expect a headline reading of 50.1 for that, up from 48.1 for the previous month.