China's closely-watched official manufacturing purchasing managers index (PMI), due out on Thursday, is expected to show factory activity contracted for the first time in 10 months as the world's second largest economy suffers a deepening slowdown.
The government's official PMI, which tracks large and state-owned firms, is forecast to fall below the key 50 threshold that demarcates expansion from contraction to between 49.2 and 49.8 in July, according to four economists polled by CNBC. The PMI stood at 50.1 in June.
"Businesses in China are increasingly cautious on the growth outlook, and this is being driven by a lot of factors: the perception that the government will allow weaker growth, the strong currency, deteriorating financing conditions and policies to curb excessive consumption of high-end products and services by government officials," said Dariusz Kowalczyk, senior economist, Asia ex-Japan at Credit Agricole.
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"The official PMI will reflect this and we expect manufacturing to slow for the remainder of the year," he added.
A key drag on the manufacturing sector is tighter liquidity conditions, say economists, which is making it more difficult for businesses, particularly small and medium sized enterprises (SMEs), to raise working capital to invest and fund their operations.
