China’s factory activity falls for third straight month

Stay informed with free updates

Simply sign up to the Chinese economy myFT Digest — delivered directly to your inbox.

China’s manufacturing activity fell for a third consecutive month in July, according to an official survey on Wednesday, increasing pressure on policymakers to speed up stimulus measures to boost the world’s second-biggest economy.

The country’s official manufacturing purchasing managers’ index came in at 49.4, in line with a Bloomberg poll of analysts’ forecasts and down from 49.5 in June. A reading above 50 marks an expansion compared with the previous month.

China’s politburo this week called for faster implementation of a stimulus programme, and the central bank has cut interest rates as the government tries to meet its economic growth target of 5 per cent for this year.

China’s economy is suffering from weak domestic consumption as a prolonged property slowdown and tighter government control over business undermine confidence.

At its recent quinquennial strategic policy meeting, Beijing emphasised high-end manufacturing and an upgraded industrial sector over property and household consumption.

The non-manufacturing PMI came in at 50.2 in July, still in growth territory and in line with analysts’ forecasts of 50.2 but down from a reading of 50.5 in June.

China’s National Bureau of Statistics said on Wednesday that among the sub-indices, production was 50.1, down 0.5 from the previous month but still indicating a slight expansion.

The new orders index, however, was 49.3, down 0.2 from the previous month and indicating that demand in the manufacturing market had declined.

Employment in manufacturing and non-manufacturing was below the 50-point mark, indicating weakness in the labour market.

Despite the struggling housing market, construction activity was in positive territory. The services sub-index was flat at 50, down from 50.2 the previous month, with some areas such as entertainment and sport booming while others such as retail and capital markets in contractionary territory.

“Lower commodity prices and steel production point to weakened growth momentum of manufacturing activity in July,” Goldman Sachs wrote in a report released ahead of the figures.

The bank attributed the lower services PMI to “the persistent weakness in property and financial services sectors”.

Morgan Stanley analysts said ahead of the figures that deleveraging among local government financing vehicles and in the housing sector were posing “gravitational drags on the economy”. Emerging industries — electric vehicles and green energy — were also suffering from overcapacity.

Recommended

They said policymakers were attempting to counter fiscal tightening by widening the use of the proceeds from long-term government bond issuance to support consumption and capital expenditure. But “policy pass-through may take time”, they wrote.

China’s government has issued Rmb1tn ($138bn) of ultra long-term special government bonds to fund infrastructure and other projects and provide a stimulus to the economy.

It has also announced schemes to revitalise the property market, including a Rmb300bn programme to buy unsold housing unveiled in May.

But the real estate measures have been seen as too little to have a large impact, and economists have said that more structural measures are needed to restore investor confidence and stimulate consumption.