China July factory activity seen growing at a slightly slower pace: Reuters poll

BEIJING (Reuters) - China's factory activity likely expanded slightly less quickly in July, a Reuters poll showed on Friday, as the industrial sector's impressive recovery slowed on high raw material prices, government policies, seasonal rainfalls and rising COVID cases.

The official manufacturing Purchasing Manager's Index (PMI) is likely to edge lower to 50.8 in July from 50.9 in June, according to the median forecast of 25 economists polled by Reuters. A reading above 50 indicates expansion from the previous month.

Reasons why economists at Nomura expected major activity indicators to show broadly weaker growth in July included heavy rainfall and floods in Henan and the Yangtze River Delta, outbreaks of the coronavirus Delta variant in Jiangsu and some other provinces, local government efforts to curb crude steel output, and Beijing's latest steps to cool the property market.

"We continue to believe a more notable growth slowdown will materialize in the second half (especially in Q4) and Beijing's existing policy easing measures, including the RRR cut, will be unable to reverse the growth downtrend," Nomura said in a note on Thursday.

However, analysts from Morgan Stanley say that the current economic headwinds could be partly offset by the likely improvement in the mid- to downstream production as global demand stays buoyant and the impact of power shortage fades.

To bolster a slowing economy, the People's Bank of China (PBOC) in mid-July lowered the reserve requirement ratio (RRR) for banks to the surprise of market, releasing around 1 trillion yuan ($154.19 billion) in long-term liquidity.

China will base the pace and intensity of monetary policy on the domestic economy and inflation trends in the second half of the year, the PBOC has said.

Higher raw material prices, especially of metals and semiconductors, have eaten into the profitability of industrial firms and deterred some Chinese exporters from taking on orders.

Authorities are mindful to prevent the pass-through from high factory-gate prices to consumers, which would only add to the current economic headaches as the underlying demand remains weak.

The official PMI, which largely focuses on big and state-owned firms, and its sister survey on the services sector, will both be released on Saturday.

The private Caixin manufacturing PMI will be published on Monday. Analysts expect the headline reading will slip to 51.1 from June's 51.3.

(Reporting by Stella Qiu and Gabriel Crossley; Editing by Simon Cameron-Moore)

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