Index shows China’s manufacturing shrinking as demand falls

(By Caixin journalist Qing Na)

Activity in China’s manufacturing sector shrank slightly in July as demand declined for the first time in 12 months, according to a Caixin-sponsored survey published 1 August, indicating that the economic slowdown in the second quarter could carry over into the third.

The Caixin China General Manufacturing Purchasing Managers’ Index (PMI), which gives an independent snapshot of the sector, came in at 49.8 in July, down from 51.8 the previous month. A reading above 50 indicates an expansion in activity, while a number below signals a contraction.

The latest reading, down from a three-year high in June, marks the first contraction in nine months.

The Caixin PMI is one of the earliest available monthly indicators of activity in the world’s second largest economy. Manufacturing accounted for 27% of China’s GDP in the first half of the year, government data show.

The official manufacturing PMI, released by the National Bureau of Statistics on 31 July, dipped 0.1 points to 49.4 in July, marking the third straight month in contractionary territory.

Caixin’s survey showed that manufacturing output growth was marginal, slowing to the weakest pace in nine months.

Performance was even more disappointing on the demand side, with total new orders decreasing for the first time since July 2023. Surveyed businesses attributed the sluggish demand to clients tightening their budgets.

Manufacturers’ purchased items declined for the first time in nine months as overall demand shrank.

Nevertheless, external demand continued to grow, albeit at a rate slightly lower than in June.

The labour market shrank for the 11th straight month, but the contraction was marginal, according to the survey.

Price pressures on manufacturers remained in July. Input costs rose for the fourth straight month — although moderately — on rising raw material prices. However, output prices fell for the sixth time in the past seven months as a result of intensified market competition, the survey showed.

Delays in supplier logistics worsened, with the corresponding gauge falling to the lowest level in seven months.

Companies generally remained optimistic. Some were confident that sales would improve as new products are released. The sentiment was reflected by a rebound in the gauge for future activity expectations, although it was the second lowest in nine months.

China’s economy slowed in the second quarter. The lower-than-expected 4.7% growth rate would make it challenging to hit the government’s annual target of around 5%, said Wang Zhe, a senior economist at Caixin Insight Group.

The view was shared by other economists. In a report released on 31 July, Nomura economists noted that the three consecutive months of contraction in the official PMI point to a further economic slowdown in the second half, as the property sector slump continues to pose a drag.

“The Politburo meeting held yesterday acknowledged diverging economic performance and pledged to strengthen counter-cyclical policy actions, but also exhibited limited urgency in rolling out near-term stimulus measures,” they said.

“The most prominent issues are still insufficient effective domestic demand and weak market optimism,” Wang said. Hence, he suggested that policy efforts should focus on improving employment, intensifying policy stimulus and unleashing market vitality.

This article was first published by Caixin Global as “China’s Manufacturing Shrinks for First Time in Nine Months as Demand Falls, Caixin PMI Shows”. Caixin Global is one of the most respected sources for macroeconomic, financial and business news and information about China.

Related: China’s plans for economic recovery still uncertain after third plenum | Beijing’s repositioning of the real estate market is a risky endeavour | How Chinese companies are going through a fight for survival