China's manufacturing sector experienced an unexpected slowdown in July, marking the first time the industry has contracted in five months. The official manufacturing purchasing managers index (PMI), published by the National Bureau of Statistics on Friday, dropped to 49.2 from its June reading of 50.3. This performance fell below the expectations of economists and highlights ongoing challenges for the world's second-largest economy.
The decline was driven by significant drops in key sub-indices. The measure for new orders fell to 48.5, its lowest point since 2023, down from 51.2 in June. Similarly, the production sub-index decreased to 49.9 from 51.4. In the PMI system, PMI readings, based on surveys of factory managers, are measured on a scale of 0 to 100. A reading above 50 indicates an expansion, and below 50 reflects a contraction.
Several factors contributed to the downturn, according to Capital Economics, including weak domestic demand for goods and a decline in building activity. Additionally, severe weather conditions, specifically several typhoons that impacted the country in July, likely disrupted manufacturing operations. The broader economy continues to face pressure from sluggishness in domestic spending and investment, as a yearslong weakness in its massive property sector hits consumer confidence. Fierce competition for jobs has left workers worried over spending.
Data shows the economy grew at its slowest annual rate in over three years during the April-June quarter, reaching 4.3%. This result is below China’s official full-year target range of 4.5% to 5%. Meanwhile, international tensions persist, as countries like the U.S. have raised concerns regarding excess industrial capacity in sectors such as solar panels and automobiles. Critics argue that heavy state subsidies are fueling an export surge of cheap goods that threatens other economies, though Beijing has rejected these claims. According to Gary Ng, a senior economist at Natixis, China’s economic model continues to prioritize productivity through specific policy preferences. While Chinese leaders, including those at a recent Politburo meeting on Thursday, have pledged to bolster domestic consumption, economists anticipate that the nation will remain reliant on exports to support growth for the remainder of the year.
