China's manufacturing activity shrank for a third month in June, a survey showed on Monday, suggesting factory managers are struggling to find domestic buyers as their overseas sales stutter in the face of a fragile trade truce with the U.S.
The official purchasing managers' index (PMI) rose to 49.7 in June from 49.5 in May, remaining below the 50-mark separating growth from contraction and in line with a median forecast of 49.7 in a Reuters poll.
The new orders sub-index rose to 50.2 in June from 49.8 in May, while the new export orders sub-index improved to 47.7 from 47.5.
The non-manufacturing PMI, which includes services and construction, grew to 50.5 from 50.3.
With domestic demand still sluggish, dragged down by a prolonged property crisis that is squeezing household spending and exacerbating deflationary pressures, factory owners lack compelling alternatives to sitting on inventory and waiting to see if Beijing can strike deals to ease trade tensions with the United States and European Union, analysts say.
But authorities cannot afford for China's vast manufacturing sector to stagnate or shrink, if its ambitious 2025 growth target of "around 5%" is to be met.
Profits at China's industrial firms swung sharply back into decline in May, dropping by an annual 9.1%, separate National Bureau of Statistics data showed on Friday, which officials attributed to weak demand and falling industrial product prices.
Policymakers are confident they can push ahead with reforms launched late last year to transition the world's second-largest economy from a manufacturing-led model to a consumer-driven one, Premier Li Qiang told delegates at World Economic Forum and Asian Infrastructure Investment Bank meetings last week.
Such a shift in the engines of growth, which economists say is crucial to securing China's future, could be progressed while maintaining strong growth, Li said.
But economists warn the transition could take years, and that reform typically comes at the cost of a more subdued economy in the short term.
While the U.S. and China have settled on a framework trade deal, analysts expect eventual U.S. tariffs to remain well above historic levels, maintaining pressure on exporters and officials to find alternative markets or boost domestic demand.
Analysts polled by Reuters forecast the private sector Caixin PMI at 49.0, up from 48.3 a month prior. The private data will be released on Tuesday.
