China’s factory activity contracted for a second straight month in August, but the official PMI reading of 49.8 was better than expected, signaling a less severe slowdown. While exports have provided a crucial boost, domestic demand remains weak, with growth slowing and unemployment rising. Economists anticipate a pickup in the coming months as fiscal spending increases and adverse weather conditions fade.
China's manufacturing sector experienced a contraction for the second consecutive month in August, although the slowdown was less severe than economists had predicted. The official Purchasing Managers' Index (PMI) registered at 49.8, a slight improvement from July's 49.2 and surpassing the forecast of 49.6. This figure indicates a continued struggle for the world's second-largest economy, which is facing challenges from weakening domestic demand and a persistent property sector slump.
The official data, released on Monday, showed that while the overall PMI edged up, growth momentum has been waning. The Chinese economy expanded by 4.3% in the second quarter, its slowest pace since late 2022. The latter half of the year has seen consumer spending falter, urban investment decline, and unemployment rates creep up. Retail sales and industrial output growth slowed in July, and industrial profit growth reached its lowest point this year.
Exports have served as a critical pillar supporting China's economy, particularly with the global demand for AI infrastructure boosting sales of Chinese tech products. Outbound shipments have seen double-digit growth for much of the year, helping to offset external economic shocks.
Stimulus Efforts Begin to Take Hold
Despite the ongoing challenges, economists are cautiously optimistic about the latter half of the year. They anticipate improved growth as adverse weather conditions subside and local governments ramp up fiscal spending. Tianchen Xu, senior economist at the Economist Intelligence Unit, noted that Beijing is likely to accelerate fiscal spending, driven by concerns over the downturn in urban investment. This increased spending is expected to fast-track project approvals and fund disbursements, with its full impact anticipated in the coming months.
Signs of recovery in domestic demand are emerging. Both supply and demand sub-indexes improved in August, with production and new orders expanding to 50.4 and 50.6, respectively. The new export orders sub-index also rebounded to 50.1 from 49.6 in July, suggesting a recovery in overseas demand despite global economic uncertainties.
However, challenges persist. Sub-indexes for raw materials inventory and employment remained in contractionary territory, below the 50-mark threshold. The high-tech equipment manufacturing sector outperformed the broader industry, with production and new orders for electronic machinery, equipment, and computer communication devices exceeding 53. Conversely, consumer goods production lagged at 49.
Firms are expressing optimism for a boost in economic activity as local governments increase their spending, according to Nguyen Hoang Nam, China economist at Capital Economics. An increase in factory-gate price sub-indexes also points to renewed inflationary pressures, partly driven by rising global crude and metal prices. Zhiwei Zhang, president at Pinpoint Asset Management, suggested that higher commodity prices might benefit upstream manufacturers, though he cautioned that demand remains weak and price increases are influenced by supply constraints.
The non-manufacturing gauge, which encompasses construction and services, held steady at 49% in August. However, the construction industry sub-index saw a slight decrease to 46.9%. Within the services sector, wholesale, retail, and capital markets services activity contracted.
Looking ahead, the private RatingDog manufacturing PMI survey is expected to show a stronger rebound, potentially reaching 51, according to a Reuters poll. This gauge, which typically reflects smaller, export-oriented firms, has historically presented a more optimistic view than the official PMI.
