Key Takeaways:
China's economy lost momentum in July as both factory and services activity slipped into contraction for the first time since late last year.
The National Bureau of Statistics said Friday the official manufacturing purchasing managers' index fell to 49.2 in July from 50.3 in June, undershooting the 50.0 consensus estimate in a Reuters poll of 31 economists. The non-manufacturing PMI — covering services and construction — dropped to 49.0 from 50.2, marking the first simultaneous contraction in both gauges since November.
"The data confirms that domestic demand remains the weak link in China's recovery, with the property slump and cautious household spending outweighing strong export orders," said Rachel Tang, Hong Kong-based macro analyst at Edgen. "The Politburo will need to address this imbalance, but major stimulus still looks unlikely given that exports and industrial profits remain supportive."
The manufacturing sub-index for new orders contracted for a second consecutive month, while the employment gauge stayed in negative territory, signaling persistent weakness in the labor market. Industrial profits rose 15.1% in June from a year earlier, slowing from 21.1% growth in May, as cost pressures from the Middle East war and tepid domestic consumption squeezed margins. Goods exports surged 27% year-on-year in U.S. dollar terms in June, providing a crucial buffer for factory output, but the divergence between external and internal demand has widened to its largest gap in two years.
The simultaneous contraction in both PMIs raises the stakes for the Politburo, China's top decision-making body, which is due to meet by the end of July to review economic policy. Analysts expect policymakers to stick with existing tools — such as stepping up funding for infrastructure projects — rather than unveiling large-scale stimulus. The People's Bank of China has already injected 600 billion yuan via overnight reverse repos at 1.25% and 206.5 billion yuan through seven-day reverse repos at 1.40% this week to keep liquidity ample. The Caixin/S&P Global manufacturing PMI, which tracks smaller, export-oriented private firms, is due Aug. 3 and is expected to dip to 51.5 from 51.7.
What the contraction means for markets
The PMI miss adds to evidence that China's post-pandemic recovery is losing steam. Gross domestic product expanded at the slowest pace in more than three years in the second quarter, weighed by soft retail sales and weak property investment. The Shanghai Composite Index closed up 0.40% on Wednesday, but the CSI 300 has fallen 4.2% this quarter, while the offshore yuan has weakened past 7.25 per dollar, reflecting investor skepticism about the growth outlook.
For commodity markets, the data is a headwind. China accounts for more than half of global copper and iron ore consumption, and a sustained contraction in factory activity would likely weigh on prices. Iron ore futures on the Dalian exchange fell 1.8% Friday following the release, while copper on the London Metal Exchange slipped 0.6%.
The last time both official PMIs fell below 50 simultaneously was in November, when a wave of COVID infections disrupted activity. That contraction lasted only one month before a policy-driven rebound. This time, the drag is structural — a years-long housing downturn and weak job security have sapped household confidence, nudging consumers to save rather than spend. Without a meaningful improvement in domestic demand, the recovery may remain lopsided, dependent on exports that face rising tariff risks from the U.S. and Europe.
This article is for informational purposes only and does not constitute investment advice.
