BEIJING July 1 (Reuters) – China's factory activity responded unexpectedly in June, as the demand for domestic and export failed, showed a private sector survey on Monday and pointed to to further strain on its large production sector as the Chinese and American trade wars continue.
Discouraging readings suggest that the world's second largest economy still loses steam despite a supportive support over the past year and underlines the urgent need for more incentives.
Leaders in the United States and China agreed at the G20 summit in Japan this weekend to start trading negotiations, giving investors some reason for optimism, although analysts say the lack of material agreements from the meeting means China's economic woes are likely to persist.
Caixin / Markit Manufacturing Purchasing Managers 'Index (PMI) for June came in at 49.4, the worst reading since January and below economists' expectations of 50.0.
It was the first time in four months that the sharp index fell below the neutral 50-degree dividend expansion from the monthly contraction.
The survey was in line with an official meter on factory activity that was published on Sunday, which showed that the production project was faster than expected.
"China's economy came under further pressure in June," said Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, in a note accompanying the data.
"It is crucial for policy makers to increase countercyclical policies," he said.
Factory development and new orders both went together for the first time since January, with some companies reporting that they had stopped the production lines because of the trade conflict.
Business confidence dropped to the lowest in over seven years as a result, and manufacturers shed jobs for the third fast month.
The new order index of the Caixin surveys ̵[ads1]1; which measures new work both at home and abroad – fell sharply to 48.8 from 50.7 last month.
Global trade war from the US and China trade war builds as the conflict intensifies and enters its second year, interferes with supply chains, rattles financial markets, and discourages many companies from making new investments.
Tensions between the world's two largest economies increased sharply in May, when talks to reach a broad agreement collapsed when Washington accused Beijing of rejecting promises of reform. Both sides raised tariffs on each other's goods and the White House threatened even more.
But Chinese policemen have also had significant weaknesses at home.
While most US-China tariffs are expected to hit Chinese export-oriented companies the hardest, the PMI survey suggested orders from domestic customers chilled faster in June than new overseas operations.
Despite a sustained financial support program that started early last year, everything from higher infrastructure spending to tax cuts to a host of measures aimed at continuing to struggle with smaller companies in liquid form.  While new export orders were reduced and pointed to further factory weakness in the third quarter, the decline was modest.
The CEBM group's Zhong said it could reflect that a rush of Chinese companies to ship goods to the US before any additional charges. Similar "frontloading" kept China's headline export growth quite robust too much last year before sharply declining in the fourth quarter.
With commercial war that threatens to become longer and costly, many economists believe that Beijing must roll out more stimulus to meet its economic growth target of 2019 at around 6-6.5 percent.
Market expectations suggest further cuts in the amount of cash the banks have to hold as reserves and even higher fiscal expenditures, although some China observers also expect the central bank to cut one or more of its key interest rates to reduce corporate borrowing.