China's factory activity shrinks for first time in 5 months
What's the story
China's factory activity has seen an unexpected contraction in July, the first such decline since February. The downturn is largely attributed to a slump in domestic orders and disruptions caused by typhoons. The official manufacturing purchasing managers' index (PMI) fell to 49.2 from June's 50.3, dropping below the 50-point mark that separates expansion from contraction, according to data released by the National Bureau of Statistics on Friday.
Economic analysis
New orders sub-index fell to 38-month low
The PMI's fall was mainly driven by a drop in the new orders sub-index, which fell to 48.5, the lowest in 38 months.
Julian Evans-Pritchard, head of China economics at Capital Economics, said "domestic weakness appears largely to blame, while the export orders index softened a bit."
He expects local governments will honor Beijing's policy support pledges to boost domestic demand.
Sectoral slowdown
Widespread weakness across sectors
The decline in factory activity isn't an isolated case. The construction PMI has hit a record low of 47.0, while the services gage has fallen to its weakest since the initial COVID-19 lockdowns.
The composite PMI also dropped to 49.3, the lowest since the pandemic ended in 2022, indicating widespread weakness across sectors.
A spokesperson from the statistics bureau attributed some of this PMI weakness to recent typhoons that halted work on many projects.
Future outlook
Future output expectations remain resilient
Despite the dismal readings, indices tracking firms' expectations for future output remained resilient across all official PMIs in July. This includes an improvement in the construction sector.
Evans-Pritchard said "Firms believe the latest deterioration in activity will prove short-lived, perhaps because they anticipate a stronger tailwind from fiscal policy over the rest of the year."
Economic growth
Q2 growth slowest in over 3 years
In Q2, China's economy grew 4.3% year-on-year, the slowest pace in over three years. This was below the lower end of the full-year target of 4.5% to 5%.
Exports have been one of the few reliable growth engines for the economy this year but are now showing signs of strain.
A survey by China Beige Book found US-bound shipments fell outright for the first time in several months, indicating a slowdown in factory activity and job growth across all sectors.