China’s manufacturing activity contracted for a second consecutive month in August, though the decline was smaller than markets had anticipated, maintaining pressure on Beijing to shore up the slowing economy.
The official purchasing managers’ index edged up to 49.8 in August from 49.2 in July, according to data from the National Bureau of Statistics, beating the 49.6 forecast from Reuters-polled economists.
Any reading below 50 indicates contraction, meaning China’s vast factory sector has now shrunk for two straight months as domestic headwinds continue to mount.
China’s economy has come under mounting strain, with growth slowing to 4.3% in the second quarter, the weakest pace since late 2022, as soft domestic demand and a prolonged property slump weigh heavily on 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 across key sectors.
Retail sales and industrial output both slowed in July, while growth in industrial profits cooled to its weakest pace this year, adding to the bleak domestic picture.
Exports have been one of the few pillars propping up growth, with a global boom in AI infrastructure spending lifting demand for Chinese-made tech goods and outbound shipments recording double-digit growth for most of the year.
Supply and demand conditions both improved in August, with the sub-indexes tracking production and new orders expanding to 50.4 and 50.6 respectively, according to the NBS release.
New export orders rebounded to 50.1 in August from 49.6 the previous month, signalling a recovery in overseas demand even as the global economy weathered prolonged Middle East turmoil.
High-tech equipment manufacturing outpaced the broader factory sector, with production and new orders readings for electronic machinery, equipment, and computer communication devices topping 53, while consumer goods production lagged at 49.
Beijing is likely to further accelerate fiscal spending as policymakers have grown increasingly worried over the collapse in urban investment, said Tianchen Xu, senior economist at the Economist Intelligence Unit, adding: “This should fast-track project approval and fund disbursement.”
Xu noted the effect of such policy expansion will only become more prominent next month and in the fourth quarter, pointing to early signs of recovery in domestic demand as a reason for cautious optimism.
Overall, firms appeared to be anticipating “a boost to economic activity as local governments step up spending over the rest of the year,” said Nguyen Hoang Nam, China economist at Capital Economics.
The improvement in factory-gate price sub-indexes also pointed to renewed inflationary pressures, driven in part by higher global crude and metal prices affecting upstream manufacturers.
“The rise of commodity prices may have benefited some firms in the upstream manufacturing sector,” said Zhiwei Zhang, president at Pinpoint Asset Management, “although the price gains were driven by supply constraints, as demand remained weak.”
The non-manufacturing gauge, which tracks construction and services activity, stayed unchanged at 49% in August, though the sub-index for the construction industry fell 0.1 percentage point to 46.9%.
The private RatingDog manufacturing PMI survey, due Tuesday and tending to capture smaller and more export-oriented firms, is estimated to show factory activity climbing to 51, according to a Reuters poll.