China’s official Manufacturing Purchasing Managers’ Index (PMI) fell to 49.2 in July, down from 49.5 in June, according to data released by the National Bureau of Statistics (NBS) on Wednesday. The reading marks the second consecutive month below the 50-point threshold that separates contraction from expansion, signaling persistent weakness in the country’s factory sector. The Non-Manufacturing PMI, which covers services and construction, also declined to 49.0 from 50.5 in June, indicating a broad-based slowdown across the economy.
Key sub-indices point to softening demand
The July manufacturing data showed declines across most sub-indices. The production index fell to 50.1 from 50.6, while the new orders index dropped to 48.5 from 48.8, reflecting weaker domestic and external demand. Export orders also remained in contraction territory at 47.5, down from 48.3, as global trade headwinds continue to weigh on Chinese manufacturers.
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Employment in the manufacturing sector also contracted for a third straight month, with the employment index at 47.3, down from 47.9. This suggests that factories are not only reducing output but also trimming their workforces, a sign that the slowdown is deepening.
Services and construction lose momentum
The Non-Manufacturing PMI’s drop to 49.0 is particularly notable because it marks the first time since December 2022 that this index has fallen below the 50 threshold. The services business activity index slipped to 49.3 from 50.2, while the construction sector index fell sharply to 48.0 from 52.3, reflecting a cooling property market and reduced infrastructure spending.
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Analysts had expected a slight improvement in the Non-Manufacturing PMI, but the actual data came in well below consensus forecasts. The decline in construction activity is especially concerning, as it points to continued weakness in the property sector, which remains a major drag on the Chinese economy.
What this means for the Chinese economy and global markets
The latest PMI readings add to a growing body of evidence that China’s economic recovery is losing steam. The country’s GDP grew by only 4.7% in the second quarter, below the government’s annual target of around 5%. With both manufacturing and services now contracting, the risk of a sharper slowdown in the second half of the year is rising.
For global markets, the weak data could temper expectations for Chinese demand for commodities, from copper to crude oil. It also raises the likelihood of further policy support from Beijing, including potential interest rate cuts or increased fiscal spending. However, policymakers have so far been cautious in rolling out large-scale stimulus, focusing instead on targeted measures to support specific sectors.
Official PMI vs. Caixin PMI: A tale of two surveys
The official NBS PMI surveys large and state-owned enterprises, while the Caixin PMI, released later this week, focuses on small and medium-sized private firms. In recent months, the two surveys have often told different stories, with the Caixin index showing more resilience. The divergence reflects the uneven nature of China’s recovery, where export-oriented private firms have fared better than their state-backed counterparts.
Investors will be watching the Caixin manufacturing PMI, due out on Thursday, for additional clues on the health of the private sector. A reading below 50 there would reinforce the picture of a broad-based slowdown.
As the Chinese economy grapples with weak demand, a property crisis, and subdued consumer confidence, the July PMI data underscores the challenges facing policymakers. The upcoming Politburo meeting, where economic priorities are often set, will be closely scrutinized for any signs of a shift toward more aggressive stimulus measures.
