3rd LD-Writethru-China Focus: China manufacturing activity retreats in July

China's manufacturing business activity retreated slightly in July from the previous month, barely avoiding a contraction last seen in February.

The manufacturing purchasing managers' index (PMI), a key measure of factory activity in China, posted at 50.0 in July, down from 50.2 in June, according to data compiled by the National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchasing.

Factory activities had remained in expansion territory for a four-month period extending from March to June. July's data came in right at the reading that demarcates growth and contraction.

Zhao Qinghe, a senior NBS analyst, attributed the retreat to continued weakness in both domestic and overseas demand.

He also blamed some companies' planned production cutbacks for equipment repairs and technological upgrades, as well as unfavorable weather conditions as storms and high temperatures affected production.

The production sub-index posted at 52.4 last month, down from 52.9 in June. The sub-index for new orders came in at 49.9 in July, also down 0.2 percentage points compared to June, the data showed.

"The weak PMI data in July showed that the Chinese economy still faces heavy downward pressure, and warns that the current stabilization trend in the Chinese economy is still not solid," said Chen Zhongtao, an analyst at the China Logistics Information Center.

The government's pro-growth measures since the start of the year had led to a better-than-expected year-on-year GDP growth of 7 percent in the second quarter, unchanged from the first quarter.

Despite the steadiness, the nation's top leaders are exercising caution as they are wary of any potentials risks that could impede growth. They are also concerned about the grim prospects facing many companies, a lack of new drivers for the economy, and weakness in old drivers.

However, Chen played down the slight retreat in factory activity, saying economic fundamentals remain in good shape as employment is stable and companies are generally positive on business prospects.

"The slight decrease was a normal fluctuation," he said, agreeing with Zhao on the weather's impact on production.

The analyst added that domestic demand will see more room for growth in the rest of the year, supported by the raft of infrastructure projects set to be rolled out.

Minister of Housing and Urban-Rural Development Chen Zhenggao said in April as much as 1 trillion yuan (163.5 billion U.S. dollars) in investment would be needed if China builds 8,000 km of utility tunnels each year, not including indirect investment such as spending on steel, cement and machines.

In contrast to lukewarm manufacturing activity last month, the nation's services industry saw stronger growth momentum, with PMI for the non-manufacturing sector rising to 53.9 in July from 53.8 for June, the data showed. June was the second straight month of expansion.

Zhao Qinghe said non-manufacturing businesses were making increasing contributions to the economy's steady growth. Sectors such as transport services, postal services, telecommunications, broadcasting, Internet, software and finance all expanded last month, the data showed.

Chinese leaders have made growth their top priority for the rest of the year, vowing to "maintain a proactive fiscal policy by expanding public spending, reducing companies' burdens and encouraging private investment, while keeping the prudent monetary policy elastic."

Since the start of the year, policies including three rounds of cuts to both interest rates and banks' reserve requirement ratios, structural tax reductions, accelerated fiscal spending on infrastructure, and reduced downpayment requirements for home buyers have been rolled out to boost growth.

Based on these, manufacturing activities have expanded since March. Home sales in major cities are picking up and exports rebounded in June.

Zhang Liqun, a researcher with the Development Research Center of the State Council, said that Chinese policymakers just need to maintain the consistency and stability of macroeconomic policies. Endi