China's Manufacturing Activity Contracts in July as Weak Demand Raises Growth Concerns

China's manufacturing sector moved back into contraction in July, reflecting weaker demand and adding to concerns about the country's slowing economic momentum.

According to data released by the National Bureau of Statistics (NBS), the official manufacturing Purchasing Managers' Index (PMI) dropped to 49.2 in July from 50.3 in June. The reading fell below the 50-point threshold that separates expansion from contraction and marked the lowest level in five months. It also came in below the median forecast of 50 in a Reuters survey.

The non-manufacturing PMI, which measures activity across the services and construction sectors, also slipped below the expansion level. It declined to 49.0 from 50.2 in June, reaching its weakest reading since December 2022.

The latest figures point to increasing pressure on China's economy, which had already shown signs of slowing during the second quarter despite resilient export performance. Manufacturing exports had helped offset challenges in areas such as the property market and employment, but recent economic indicators suggested that overall growth was losing momentum.

The survey showed a notable decline in demand. The sub-index for new orders fell to 48.5 from 51.2, while the measure for new export orders eased to 49.6 from 50.1 a month earlier. The composite PMI also dropped to 49.3, compared with 50.6 in June.

NBS attributed the softer factory performance to seasonal factors and a high comparison base from earlier periods.

Commenting on the data, Zhang Liqun of the China Federation of Logistics & Purchasing said that weak domestic demand had become a major constraint on production capacity, creating significant challenges for businesses across industries.

China's economy expanded 4.3% in the second quarter, down from 5.0% in the first quarter and below the government's annual growth target range of 4.5%–5%. The weaker performance has increased expectations for additional policy support aimed at boosting domestic demand and investment.

Following a meeting on Thursday, China's Politburo acknowledged the economic challenges and stated that existing policies would be implemented while additional measures would be introduced when appropriate. The leadership reaffirmed its commitment to supporting domestic demand but did not announce specific new initiatives.

Lynn Song, Chief Economist for Greater China at ING, said fiscal policy could become the primary area of support, pointing to plans to accelerate government spending.