Weak China Data Point to Slowing Growth

BEIJING—In a first look at China’s economic performance in June, two gauges of manufacturing activity weakened as factories continued to battle overcapacity, slower growth and rising debt.

The figures released Friday, combined with other recent soft data, suggest second-quarter growth to be announced later this month was slower than the first quarter’s 6.7%, economists said. The first-quarter figure was already the slowest since the global financial crisis.

China’s National Bureau of Statistics reported Friday that the official manufacturing purchasing managers index edged down to 50.0 in June, the level that separates expansion from contraction, from 50.1 in May. The June figure, which follows three consecutive months of expansion, matched a median forecast by 13 economists polled by The Wall Street Journal.

Separately, Caixin Media Co. and research firm Markit Economics reported Fridaythat the Caixin manufacturing PMI, a competing private measure, came in at 48.6 in June, down from May’s 49.2 level. This was the fastest decline in four months and the 16th consecutive month the index has languished in contraction. Economists say the Caixin PMI tends to better reflect the outlook of smaller private companies, while the official PMI more closely tracks larger state-owned companies.

Official subindexes measuring new orders and raw material inventory both declined in June from May, while the official production subindex improved slightly, the statistics bureau said. China’s official nonmanufacturing PMI, which measures activity in the service sector and which was also released Friday, rose to 53.7 in June from 53.1 in May.

“The sentiment and outlook for the economy are still quite gloomy,” said Commerzbank AG economist Zhou Hao, adding that Britain’s vote to leave the European Union has added to the uncertainty. “I expect a little more stimulus, not a big one, but maybe a bit more fiscal spending.”

China’s second-quarter growth rate is likely to come in at around 6.5% and economic growth in the second half could fall below that, Mr. Zhou said. He gives China an 80% chance of hitting its full-year growth target of between 6.5% and 7%.

In another sign of recent weakness, rail freight volume fell by over 7% year on year during the first five months of 2016. The number of bankruptcies rose 52.5% year on year in the first quarter to 1,028, according to the Supreme People’s Court.

And despite an announcement by Beijing of a cut in production capacity in the steel and coal industries by about 10% over the next several years, the manufacturing sector continues to battle industrial overcapacity, deflation and rising debt levels, economists said.

“Overall, economic conditions in the second quarter were considerably weaker than in the first quarter, meaning there has been no easing of the downward pressure on growth,” said Zhengsheng Zhong, an analyst at CEBM Group Ltd. in a statement. “The government must strengthen its proactive fiscal policy while continuing to follow prudent monetary policy.”

But there were also some recent signs of stability after Beijing stepped-up fiscal and monetary stimulus. Year-over-year electricity consumption rose in May, as did auto sales.

Companies on the front line say they are feeling the pinch. Anhui Funan County Xiangfa Arts Co., which makes furniture, ornaments and garden equipment for export in the southeastern city of Huanggang, said production and sales are softer this year and likely to remain that way as demand continues to slip. And despite the weakening economy, labor costs continue to rise as the government tries to bolster consumption and fewer people enter the workforce as China’s population ages.

“Worker’s salaries have gone up 30% in a year,” said Wang Dengwei, general manager at Anhui Funan, which has annual revenues of about 100 million yuan ($15 million) and depends on skilled workers to make many of its handicrafts. “That is really squeezing profits.”

Industrial profits grew 6.4% year on year in the first five months of this year, down from 6.5% during the January-April period, according to official data, while profits at state-owned companies fell 9.6% year on year in January-May compared with 8.4% during January-April.

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