China's factory gloom weighs on Asia's manufacturers

By Leika Kihara

TOKYO (Reuters) -A slump in China's manufacturing activity led a generally weak performance for Asia's factories last month as business owners grappled with tepid demand, private surveys showed on Thursday, raising risks of an underpowered economic recovery in the region.

Manufacturing activity shrank in Japan and expanded at a slower pace in South Korea due partly to soft domestic demand and rising input costs, the surveys showed, adding to the gloom from a contraction in China's factory activity.

China's Caixin/S&P Global manufacturing purchasing managers' index (PMI) fell to 49.8 in July from 51.8 the previous month, the private survey showed, the lowest reading since October last year and missing analysts' forecasts of 51.5.

The reading, which mostly covers smaller, export-oriented firms, was in line with an official PMI survey on Wednesday showing manufacturing activity slipped to a five-month low.

"Looking ahead, we expect a period of below trend global growth to weigh on manufacturing activity across Asia for the rest of this year," said Shivaan Tandon, markets economist at Capital Economics.

Japan's final au Jibun Bank Japan manufacturing purchasing managers' index (PMI) fell to 49.1 in July from 50.0 in June, slipping below the 50.0 threshold that separates growth from contraction for the first time in three months.

The weakness in manufacturing in key export economies China and Japan points to a challenging outlook for the region, although economists are betting on an expected global rate easing cycle to provide a buffer.

The Federal Reserve on Wednesday flagged a possible start to interest rate cuts as soon as September if the U.S. economy follows its expected path.

The International Monetary Fund (IMF) expects Asia's economies to head for a soft landing as moderating inflation creates room for central banks to ease monetary policies to support growth. It predicts growth in the region to slow from 5% in 2023 to 4.5% this year and 4.3% in 2025.

South Korea, another key regional export engine, fared better with the PMI standing at 51.4 in July, remaining above the 50-mark for a third straight month but slowing from the 26-month high of 52.0 in June.

China again loomed large as a potential hurdle for business expansion in the region.

South Korea's exports in July, for instance, rose at the fastest pace in six months in July on strong chip sales but missed market expectations, amid worries about a sustained recovery in China demand.

The overall manufacturing sector in China could be entering a "cruel summer" after the official PMI data pointed to soft economic momentum in July, Citi Research said, suggesting more pain for countries dependent on China's vast consumer market.

Elsewhere, factory activity expanded in Taiwan but also slowed slightly from June with the PMI standing at 52.9 in July, down from the previous month's 53.2.

India's manufacturing activity expanded at a solid pace in July thanks to continued robust demand, though cost pressures were high as prices charged to clients rose at the steepest rate in over a decade.

Indonesia and Malaysia saw manufacturing activity shrink in July, the surveys showed.

(Reporting by Leika Kihara; Editing by Shri Navaratnam)