July 2, 2012 / 1:28 AM / 5 years ago

GLOBAL ECONOMY-China, Japan factory activity hits 7-mth low

* China official PMI above 50, Japan PMI below 50

* Both weakest levels in seven months as exports crumble

* India, EU and U.S. to post purchasing managers’ data Monday

* Heightens concerns over health of global economy

By Koh Gui Qing

BEIJING, July 2 (Reuters) - A factory slump in Asia’s two biggest exporters China and Japan deepened in June as crumbling orders from abroad dragged activity to seven-month lows, heightening worries that the health of the global economy is deteriorating.

The latest sign that China’s economic growth is sliding came on Sunday with a government purchasing managers’ index (PMI) dropping to 50.2 in June from May’s 50.4. The outcome was stronger than expected but it still showed that growth in manufacturing sector activity was close to stalling.

Shrinking new orders and the steepest fall in export orders since December suggested no immediate pick up for the world’s second-biggest economy.

The story was similar in Japan, home to big brand exporters such as camera and printer maker Canon Inc, which earns about 80 percent of its income outside Japan.

The June PMI, released on Friday, slipped to 49.9, below the 50-point mark that separates expansion from contraction. Japan’s index for new export orders dropped to 47.5, the sharpest pace of contraction since February.

South Korea’s PMI fell to 49.4, suggesting the factory sector shrank in June for the first time in five months. The report also indicated new export orders were falling.

PMIs are closely watched as a leading indicator of economic activity. Export orders, especially for major trading nations such as China and Japan, point to activity even further into the future and give a sense of the economic health of major demand centres such as North American and Europe.

The China and Japan orders’ data increase the risk that purchasing managers’ data from Europe and the United States may disappoint when released later on Monday. <E CONEZ>

The euro zone’s PMI is forecast to show activity still shrinking as the region deals with the debt crisis that has forced five member states to seek international financial support and threatened the future of the bloc.

Europe’s manufacturing sector is already languishing at three-year lows as the region’s debt crisis batters confidence and saps new orders. The outlook for U.S. manufacturers is brighter, with factories still expanding, albeit more slowly.

POLICY SUPPORT

To shield itself from a possible recession in Europe, and a patchy U.S. economic recovery, analysts believe China needs to further relax monetary policy as early as this month.

Beijing could lower the reserve requirement ratio, or the level of cash commercial banks must hold as reserves, by another 100 basis points from a lofty 20 percent, analysts say.

The central bank has already cut the ratio three times since November and surprised financial markets in June by cutting interest rates for the first time since the global financial crisis.

“The weakness of the PMI... will likely push policymakers to introduce incremental measures such as reserve requirement ratio cuts and easing lending restrictions to stabilise growth,” said Ting Lu, an economist at Bank of America-Merrill Lynch in Hong Kong.

Japan’s factory sector shrank in June for the first time in seven months, data showed late last week, a s a rebuilding boom after the 2011 earthquake and tsunami lost steam.

Japan’s PMI slipped to 49.9 in June, which indicates activity was contracting. Japan’s index for new export orders fell to 47.5, pointing to the sharpest pull back since February.

“This bodes ill for growth heading into the second half of the year, especially given the fragility of demand in external markets,” said Alex Hamilton, an economist at Markit, which gathers the data.

The Bank of Japan has loosened monetary policy this year and the central bank has repeatedly said it is willing to do so again if needed.

Many central banks in Asia, and elsewhere, have loosened policy this year as Europe’s debt crisis weighed on the global economy.

Most economists polled by Reuters expect the European Central Bank to cut borrowing costs on Thursday in the latest efforts to try to revive the regional economy. But internal resistance to the central bank reviving its bond-buying programme remains high.

An India PMI is released later on Monday.

India’s PMI has remained above the 50 level for more than three years, although the country reported its weakest economic growth in nine years in the March quarter at 5.3 percent.

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