China’s July factory activity shrinks, services grow more slowly

BEIJING (Reuters) – China’s manufacturing activity in July shrank for a third month, an official factory survey showed on Wednesday, keeping alive expectations Beijing will need to launch more stimulus as a protracted property crisis and job insecurity drag on growth.

The official purchasing managers’ index (PMI) fell to 49.4 in July from 49.5 in June, below the 50-mark separating growth from contraction but beating a median forecast of 49.3 in a Reuters poll.

The world’s second-largest economy grew much slower than expected in the second quarter, with the consumer sector a particular cause for concern. Retail sales growth sank to an 18-month low as deflationary pressures forced businesses to slash prices on everything from cars and food to clothes.

While half of the 300 billion yuan ($41.40 billion) in ultra-long treasury bonds China’s state planner announced on Thursday will be allocated to support a programme of consumer trade-ins, that amount is seen as too little to meaningfully boost economic recovery, as it is equivalent to just 0.12% of economic output and 0.3% of 2023’s retail sales.

Solid Chinese exports have provided some support to factory managers in recent months and propped up progress towards the government’s growth target of around 5%, but as a growing number of trade partners consider import tariffs, the jury is out on whether that boost can be sustained.

Outbound shipments grew at their fastest pace in 15 months in June, while imports unexpectedly shrank, suggesting domestic demand remained weak and manufacturers were frontloading orders to get ahead of tariffs from trade partners.

Meanwhile, non-manufacturing activity expanded more slowly in July, pointing to slowing domestic demand for services and reinforcing how troubling a years-long crisis in the property sector is.

The official non-manufacturing purchasing managers’ index (PMI), which includes services and construction, slowed to 50.2 from 50.5 in June.

Depressed domestic consumption is closely related to falling property valuations that have left families feeling poorer as 70% of household wealth is in real estate.

New home prices fell at their fastest pace in nine years in June.

Analysts expect the government to implement another round of property-supporting policy measures after a meeting of the Politburo, a top decision-making body of the ruling Communist Party this week.

On Tuesday, state media reported China will step up its macroeconomic policy and counter-cyclical adjustments and expand domestic demand by stimulating consumption.