China’s manufacturing Purchasing Managers’ Index (PMI) slipped to 49.4 in July, down from 49.5 the previous month, remaining below the pivotal 50-point threshold that distinguishes expansion from contraction. This marks the fifth month this year that the index has languished below this benchmark, signaling prolonged softness in manufacturing conditions. The non-manufacturing PMI also experienced a slight dip to 50.2 from 50.5.
The deceleration in new orders and the persistent malaise in the real estate sector underpin the weak PMI readings. The property market’s downturn, accompanied by a decline in construction business activity and new orders, has been weighing on economic performance. In response, the government has rolled out a series of policy adjustments aimed at bolstering the economy, including recent interest rate cuts and plans to expedite the issuance of special-purpose bonds.
Despite domestic headwinds, China’s exports have displayed unexpected resilience, potentially fueled by a “rush shipment” effect as companies anticipate further trade disruptions. New export orders nudged up slightly to 48.5 percent in July, while South Korea and Vietnam reported robust export growth in the same period. However, the sustainability of this trend is uncertain given the ongoing global trade frictions and the tepid recovery of major economies like the U.S., where second-quarter GDP growth was buoyed by inventory builds but remains subdued.
The inventory cycle remains fragile, with both raw material and finished goods inventories contracting further. This indicates that manufacturers are cautious about building up stocks amid weak demand signals. Commodity prices, particularly for metals, have also declined, reflecting reduced industrial activity during the seasonal lull and underlying demand concerns.
In response to these challenges, Chinese policymakers have signaled a more proactive stance. The Politburo meeting held on July 30 underscored the need for macroeconomic policies to be more forceful, hinting at the preparation and timely introduction of additional policy measures. These include accelerating the issuance and use of special-purpose bonds and leveraging long-term special treasury bonds to support strategic initiatives and critical sectors.
The government is also looking to stimulate consumer spending through large-scale equipment upgrades and the promotion of durable goods consumption. In the real estate sector, there are moves to stabilize the market by balancing supply and demand, converting existing housing stock into affordable housing, and ensuring project completions. Moreover, efforts to address local government debt risks and improve the business environment for private enterprises are being prioritized.
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