*

Factory activity contracts for third month, albeit more

slowly

*

New orders, purchase volumes, supplier delivery times pick

up

*

Infrastructure spending boosts non-manufacturing activity

growth

*

More stimulus needed to offset slowing exports

(Recasts, adds analyst comment in paragraphs 4-5, 8, 11, 20-21,

graphic, further details and context throughout)

By Joe Cash

BEIJING, June 30 (Reuters) - China's manufacturing

activity shrank for a third straight month in June, though at a

slower pace, as increases in new orders, purchasing volumes and

supplier delivery times signalled that policy support rolled out

since late last year is taking effect.

But business sentiment remains subdued, Monday's survey

showed, with employment, factory gate prices and new export

orders still languishing, and keeping alive calls for even more

stimulus as authorities deal with U.S. President Donald Trump's

tariff onslaught and chronic weakness in the property sector.

The National Bureau of Statistics purchasing managers' index

(PMI) rose to 49.7 in June from 49.5 in May, matching the median

forecast in a Reuters poll but remaining below the 50-mark that

separates growth from contraction.

"Two months of successive improvement, that's a decent

reading given June was the first full month without Trump's

prohibitive 100%-plus tariffs," said Xu Tianchen, senior

economist at the Economist Intelligence Unit.

"There is still evidence of frontloading in trade, but the

tariffs are lower now and manufacturers are preparing to ship

holiday season goods," he added.

The new export orders sub-index remained in contraction for

a 14th straight month in June, inching up to 47.7 from 47.5 in

May, while employment diverged from other indicators by

deteriorating further. However, new domestic orders rose to 50.2

from 49.8, and purchasing volumes jumped from 47.6 to 50.2 --

offering policymakers some hope that domestic demand may be

starting to recover.

Zichun Huang, China economist at Capital Economics, said the

PMIs suggested the world's second-largest economy had regained

some momentum over the past month, but warned tensions with the

West would continue to squeeze its exports and there were still

signs of deflationary pressures.

The non-manufacturing PMI, which includes services and

construction, grew to 50.5 from 50.3.

Activity in the food and beverages, travel, hospitality and

logistics sectors fell this month, NBS senior statistician Zhao

Qinghe said in a statement. However, this drag was offset by a

pickup in the construction PMI, which rose to a 3-month high of

52.8, Capital Economics' Huang said.

"Fiscal support looks to have continued to support

infrastructure spending," Huang added, but cautioned that "a

fading fiscal tailwind is likely to slow activity in the second

half of the year."

MORE STIMULUS

Uncertainty also lingers among factory owners, as the

business outlook index - which normally moves in line with the

headline PMI - dropped in June and suggested producers were

waiting on a more durable trade deal to a fragile framework

agreed between Beijing and Washington earlier this month.

That puts pressure on policymakers to roll out more support

measures, as the government 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, 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 China's 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 say the transition could take years, and that

reform typically comes at the cost of a more subdued economy in

the short term.

"Exports are expected to decelerate in the second half of

the year, and domestic deflationary pressures will intensify,"

said Dan Wang, China director at Eurasia Group, who expects more

stimulus in coming months.

"Household consumption cannot be a real short-term driver,

but fiscal spending in things like infrastructure can deliver

the kind of growth required to hit this year's target."