China's manufacturing activity dropped to its lowest in five months in July, reflecting the struggles of factories dealing with declining new orders and reduced prices, according to an official survey released on Wednesday. The National Bureau of Statistics (NBS) reported the purchasing managers' index (PMI) at 49.4, slightly down from 49.5 in June and below the 50-mark that indicates growth, though marginally above the Reuters poll forecast of 49.3.
Key Highlights:
- Continued Contraction: The PMI contracted for the third consecutive month, signaling ongoing challenges for China's $18.6 trillion economy, which saw slower-than-expected growth in Q2.
- Demand and Prices: Both new orders and new export orders sub-indices contracted again in July. Employment and factory gate prices also remained negative.
- Economic Sentiment: Domestic demand is weakening, and external trade tensions are impacting sentiment among manufacturers.
- Policy Response: There are signals from Chinese leaders for more stimulus aimed at boosting incomes and domestic demand, though specific measures have not been detailed.
Economic Challenges:
- Consumer Spending: There has been a significant reduction in consumer spending on high-ticket items, with a notable impact on car sales, which declined for the third month in June. Starbucks reported a 14% drop in quarterly sales in China, as consumers opted for cheaper options.
- Property Market Impact: Depressed property valuations are affecting household wealth, with new home prices falling at the fastest rate in nine years in June. The construction sub-index also showed slower growth in July.
- Export Dependence: While exports have provided some support, there is uncertainty about sustaining this boost amid increasing import tariffs from trade partners.
Government Actions and Outlook:
- Stimulus Measures: Chinese leaders have hinted at further stimulus measures, such as ultra-long treasury bonds to support consumer trade-ins, though the amount is seen as insufficient for a significant economic recovery.
- Policy Expectations: Analysts like Gary Ng from Capital Economics see potential for increased policy support to underpin economic recovery. However, Wang Tao, UBS chief China economist, anticipates only modest policy adjustments without major new stimulus initiatives.
Conclusion:
China's manufacturing sector continues to face significant headwinds, with weak domestic and external demand posing challenges to economic stability. While some policy measures are expected to support recovery, substantial new stimulus appears unlikely, leaving the outlook for China's economy cautious for the remainder of 2024.
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