Key Highlights

  • China's official Manufacturing PMI rose to 49.8 in August from 49.2 in July, beating economists' forecast of 49.6 but remaining below the 50-point threshold separating growth from contraction.
  • China's economy grew 4.3% in the second quarter, its weakest pace since late 2022, as soft domestic Demand and a prolonged property slump continue to weigh on activity.
  • New orders and production sub-indexes returned to expansion in August, rising to 50.6 and 50.4 respectively, while new export orders rebounded to 50.1 from 49.6 in July.
  • Economists expect growth to improve in the coming months as adverse weather fades and local governments accelerate fiscal spending to support the economy.

A Second Month of Contraction, but a Smaller One

China's manufacturing activity shrank for a second straight month in August, though by less than markets had estimated, keeping pressure on Beijing to support an economy that continues to lose momentum. The official purchasing managers' index came in at 49.8, up from 49.2 in July, according to National Bureau of Statistics data released Monday, better than the 49.6 forecast in a Reuters poll of economists.

China's economy has come under mounting strain in recent months, with growth slowing to 4.3% in the second quarter, its weakest pace since late 2022, as soft domestic demand and a prolonged property slump continue to weigh on broader activity. The economic malaise deepened further in the second half of the year, with consumer spending stalling, urban Investment contracting at a faster pace, and Unemployment ticking higher.

Exports Remain a Bright Spot

Retail sales and industrial output both slowed in July, while growth in industrial profits cooled to its weakest pace of the year. Exports have remained one of the few pillars propping up growth this year, cushioning some of the drag from external shocks as a global boom in AI infrastructure spending lifts demand for Chinese-made technology goods, with outbound shipments recording double-digit growth for most of the year.

New export orders rebounded to 50.1 in August from 49.6 in July, signaling a recovery in overseas demand even as the global economy continues to weather turmoil in the Middle East. Supply and demand both improved in August, with sub-indexes tracking production and new orders expanding to 50.4 and 50.6 respectively. Sub-indexes on raw materials inventory and employment, however, remained in contractionary territory below the 50-mark threshold.

Stimulus Expected to Provide a Boost Later This Year

Economists expect growth to improve for the remainder of the year as adverse weather conditions fade and local governments accelerate fiscal spending. A senior economist at a UK-based research firm said Beijing is likely to further accelerate fiscal spending given growing concern over the collapse in urban investment, adding that this should help fast-track project approvals and fund disbursement. The effect of such measures is expected to become more visible next month and in the fourth quarter, alongside early signs of recovery in domestic demand.

High-tech equipment manufacturing outpaced the broader factory sector in August, with production and new orders readings for electronic machinery, equipment, and computer communication devices sectors all topping 53, while consumer goods production lagged at 49. Firms appeared to be anticipating a boost to economic activity as local governments step up spending over the rest of the year, according to an economist at a research firm.

Inflation Pressures Begin to Reappear

The non-manufacturing gauge, which tracks construction and services activity, stayed unchanged at 49% in August, with the sub-index for the construction industry falling slightly. Within the services category, wholesale, retail, and Capital Markets services activity all contracted. An improvement in factory-gate price sub-indexes also pointed to renewed inflationary pressures, driven in part by higher global crude and metal prices, though a strategist at an asset management firm noted the price gains were driven more by supply constraints than by a genuine pickup in demand.

A Private Survey Due Tuesday Could Paint a Rosier Picture

A private manufacturing PMI survey covering smaller and more export-oriented firms is estimated to show factory activity climbing to 51 when results are released Tuesday, according to a Reuters poll. That measure has historically painted a more optimistic picture than the official PMI reading, reflecting its focus on a different segment of Chinese industry than the larger, more state-oriented firms captured by the official gauge.