China’s official manufacturing purchasing managers’ index fell to 49.2 in July from 50.3 in June, dropping below the 50-point threshold separating expansion from contraction.
The reading missed economists’ median forecast of 50.0 and ended a four-month run at or above the expansion mark, a stretch driven largely by exporters rushing shipments ahead of US tariff increases.
National Bureau of Statistics data released Friday showed the gauge hit its weakest level since February, piling pressure on Beijing to act more decisively to boost domestic demand.
The new orders sub-index fell to 48.5, the lowest reading in 38 months, according to official data accessed via Wind, dragging down the headline figure significantly.
“Domestic weakness appears largely to blame – while the export orders index softened a bit,” said Julian Evans-Pritchard, head of China economics at Capital Economics.
Evans-Pritchard expects local governments to follow through on Beijing’s policy support pledges to prop up domestic demand in the months ahead.
Weakness spread well beyond manufacturing, with the construction PMI slumping to a record low of 47.0 and the services gauge falling to its weakest level since the initial Covid-19 lockdowns.
The composite PMI dropped to 49.3, the lowest since the pandemic ended in 2022, with a statistics bureau spokesperson attributing part of the weakness to a recent spate of typhoons that halted work on many projects.
Despite the broadly downbeat readings, indices tracking firms’ expectations for future output held up well across all official PMIs in July, including an improvement in the construction sector.
“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,” Evans-Pritchard added.
The data landed a day after China’s top policymakers acknowledged “difficulties and challenges facing the economy” at their mid-year meeting, pledging to accelerate fiscal spending.
Policymakers also promised to roll out “incremental policies” to shore up growth in the second half of the year, though the readout stopped short of announcing concrete policy steps.
China’s economy expanded just 4.3% year-on-year in the second quarter, the slowest pace in more than three years, missing the lower end of the full-year target range of 4.5% to 5%.
Exports, one of the economy’s few reliable growth engines this year, are now also showing signs of strain, with US-bound shipments falling outright for the first time in several months, according to a survey by China Beige Book.
China Beige Book found factory activity decelerated in July, with manufacturing posting its worst performance on employment as job growth deteriorated across all sectors surveyed from a year earlier.
That marks a sharp reversal from June, when shipments to the US rose 14%, helping overall exports surge 27%, the fastest pace in nearly five years, as businesses frontloaded orders ahead of expected higher American tariffs.
Retail sales also fell in July from both the prior month and a year earlier, China Beige Book found, with travel and restaurants seeing a particularly sharp year-on-year downturn.
Chinese leaders see growth at risk of falling below target in the second half as new-economy sectors such as AI fail to offset the slowdown in traditional industries, according to Eurasia Group analysts.
“Officials continue to prioritize risk containment over near-term growth,” Eurasia Group said, framing property, local government debt and smaller financial institutions as structural risks to manage over time.
The disappointing PMI data will likely sharpen market expectations for further monetary and fiscal easing measures from Beijing in the coming weeks.