China's economy is starting to splutter

Kevin Frayer/Getty Images
  • China’s official manufacturing and non-manufacturing PMIs both undershot market expectations in July.
  • New export orders fell, indicating softer external demand.
  • The slowdown not only reflects the impact of trade tensions with the United States, but also attempts to usher through corporate deleveraging and improved environmental quality from Chinese policymakers.

Activity levels across the Chinese economy slowed in July, weighed down by tighter finance, a desire to improve air quality and ongoing trade tensions with the United States.

The Chinese government’s Manufacturing Purchasing Managers Index (PMI), released by China’s national Bureau of Statistics (NBS), fell to 51.2 in July after seasonal adjustments, down from 51.5 in June and below expectations for a smaller decline to 51.3.

It was the lowest level since February this year.

PMIs measure perceived changes in activity levels across a sector from one month to the next.

Anything above 50 signals that activity levels are improving while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.

So activity levels still improved in July, albeit at a glacial pace.

The NBS said production, new domestic orders and stock purchases all grew at a slower pace compared to June while employment, inventories of raw materials and imports all declined.

New export orders — a measure of external demand — also contracted for a second consecutive month, if only marginally.

Input and output prices for finished goods also grew at a slower pace than in June.

Mirroring the performance from China’s manufacturing sector, the separate non-manufacturing PMI released by the NBS also softened, falling to 54.0 in July in seasonally adjusted terms, below the 55.0 level reported in June.

It was the slowest improvement recorded since August 2017.

New export orders fell for a third consecutive month at non-manufacturing firms, offset by a modest increase in new domestic orders. Order backlogs continued to contract, continuing the theme seen over the past year.

Despite the slowdown across these sectors, employment levels grew for the first time in more than a year.

By sector, the NBS said the services PMI fell one percentage point to 53.0 while the construction PMI dipped to a still-brisk level of 59.5, down 1.2 percentage points from June.

It said activity levels for firms linked to road transport, capital market services and real estate all deteriorated over the month.

The slowdown in both activity gauges likely reflects an ongoing push by Chinese policymakers to curb rapid growth in China’s industrial sectors, hindering the ability of firms to obtain or roll over existing debts.

A desire to improve air quality in many northern parts of the country is another headwind facing China’s industrial sector, seeing production curbed or even eliminated to ensure improved environmental standards.

Along with internal factors, growing trade tensions between China and the United States — seeing both sides slap tariffs on the other’s imports with the possibility of more to come — has potentially amplified the recent slowdown, disrupting supply chains and weakening demand for manufactured goods.

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