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China’s manufacturing activity hit a five-month low in July due to falling new orders and low prices, according to an official survey. The National Bureau of Statistics (NBS) purchasing managers’ index (PMI) fell to 49.4 from 49.5 in June, remaining below the 50-mark that separates growth from contraction. This marks the third consecutive month of contraction, slightly better than the median forecast of 49.3 in a Reuters poll.
The outlook among manufacturers remains bleak as domestic demand weakens and external pressures from trade tensions increase. China’s economy, worth $18.6 trillion, grew more slowly than expected in the second quarter. Factory gate prices were at their worst in 13 months, and employment remained in negative territory, with the employment sub-index last expanding in February 2023. This suggests a sluggish domestic economy increasingly reliant on exports for growth.
July’s new export orders sub-index also contracted for the third month, indicating that factory owners continued to cut prices to boost outbound shipments. Extreme weather conditions, including flooding and high temperatures, further hampered production in July, according to NBS senior statistician Zhao Qinghe.
Despite the economic challenges, policymakers have been slow to respond with significant measures. However, the recent economic slowdown has prompted officials to consider more substantial near-term policy support. Gary Ng, assistant economist at Capital Economics, believes this should support a recovery in activity in the coming months.
Consumers are cutting back on big-ticket items and premium-priced goods. Car sales, a major component of China’s retail sales, fell for the third month in June. Starbucks, which has thousands of stores in China, reported a 14% decline in quarterly sales as customers opted for cheaper alternatives.
Policymakers have promised further stimulus to encourage spending among low- and middle-income groups, but specific measures have not been announced. China’s state planner allocated half of the 300 billion yuan ($41.40 billion) in ultra-long treasury bonds to support a consumer trade-ins program, but this amount represents only 0.12% of economic output and 0.3% of 2023’s retail sales.
One major issue is that 70% of household wealth in China is held in real estate, and house prices fell at their fastest pace in nine years in June. The property sector, which used to account for around a quarter of the economy, has seen a slowdown, with the PMI’s construction sub-index growing more slowly in July, indicating reduced demand for new apartments and building projects.
The official non-manufacturing PMI, which includes services and construction, also slowed to 50.2 in July from 50.5 in June. Analysts are divided on whether policymakers will implement stronger stimulus measures as the economy shows few signs of recovery. Wang Tao, UBS chief China economist, expects modest policy support for the rest of 2024, potentially including further cuts to commercial banks’ reserve requirements and lower borrowing costs, but no major new stimulus measures.
NNEOMA UDENSI
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