China's manufacturing sector continues to splutter

Photo by Kevin Frayer/Getty Images

Activity levels across China’s manufacturing sector contracted last month for the first time since February, albeit by the smallest of margins.

The latest manufacturing purchasing managers’ index (PMI), released by China National Bureau of Statistics, came in at 49.9, fractionally below the 50.0 level expected by economists. It was the lowest level seen since February, and below the 50.0 level seen in June.

The index measures changes in activity levels from one month to the next. Anything above 50 signals growth, while anything below that level means contraction -— so the higher the number the better.

Writing earlier today, Richard Grace, chief currency strategist at the Commonwealth Bank, suggested that the index was likely to fall below 50, signalling contraction, “because floods disrupted economic activity across large parts of China during the month”.

According to the NBS, the weakness in July was concentrated in small and medium sized firms, offsetting an improvement in activity levels in larger manufacturing firms.

The large manufacturers PMI came in at 51.2, up from 51.0 in June. Elsewhere the readings for small and medium sized firms came in at 46.9 and 48.9, down from 47.4 and 49.1 reported in June.

Of the major subindices, output came in at 52.1, down from 52.5 in June, while new orders fell to 50.4, leaving it growing at the slowest pace since February this year.

After rising modestly in March and April, new export orders continued to decline — this time at a faster pace — with the subindex sliding to 49.0 from 49.6 in June.

Elsewhere readings on inventories, both of raw materials and finished goods, along with employment, imports and order backlogs, all continued to contract.

Despite the weak July report, manufacturers, as a whole, turned more optimistic on the outlook for activity levels with the subindex measuring expectations rising to 55.3 from 53.4.

While the manufacturing sector continued to splutter, there was better news elsewhere with the separate non-manufacturing PMI gauge, released in conjunction with the manufacturing PMI figure by the NBS, rising to 53.9 from 53.7 in June.

It now sits at the highest level seen since December last year, and indicates that activity levels across China’s non-manufacturing sectors — predominately services — are now expanding at a modest pace.

While the headline index rose modestly, somewhat surprisingly, most of the surveys internal components weakened in July compared to levels seen in June.

New orders contracted, falling to 49.9 from 50.8, while gauges on employment, selling prices, new export orders, order backlogs and inventories all came in below the 50 level signalling contraction.

Only business expectations, up 0.9 points to 59.5 — the highest level seen since February — and inventories (46.3 v 46.0) recorded a small increase compared to levels seen in June.

Given China’s tertiary sector is now the largest component of the Chinese economy, and also the fastest growing, the acceleration seen in the non-manufacturing PMI in July — albeit narrow in its composition — should help to offset weakness in the manufacturing report.

The market reaction to both data releases has been negligible, although Chinese commodity futures have ripped higher in recent trade, suggesting that some Chinese investors are betting that the weak manufacturing report may prompt a fresh wave of fiscal stimulus from policymakers. We’ll see.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at