After a five-month streak of expansion, China’s manufacturing sector shrank unexpectedly in July, casting fresh uncertainty over the growth trajectory of the world’s second-largest economy, official data released Friday shows.
The National Bureau of Statistics reported that the official manufacturing Purchasing Managers’ Index (PMI) dropped to 49.2 this month, down from 50.2 in June. This reading fell far below economist forecasts, marking the first contraction in factory activity since February 2024.
Breakdowns of the survey data show key underlying metrics also moved into contraction territory. The sub-index tracking new domestic and international orders fell to 48.5 in July, its lowest level since the start of 2023, down from 51.2 in June. Similarly, the production sub-index slipped to 49.9 from 51.4 over the same period.
On the PMI scale, which ranges from 0 to 100, any reading above 50 signals expanding activity, while a figure below 50 indicates a contraction. The July downturn offers the first major insight into China’s economic performance for the second half of 2024, and experts warn the outlook remains challenging.
“This latest PMI reading is an unpromising opening for the first wave of second-half economic data,” Lynn Song, chief economist for Greater China at ING Bank, noted in a recent analysis.
Economists from Capital Economics point to multiple factors driving the unexpected contraction. Softening domestic demand, including a slowdown in construction-related manufacturing output, was the primary drag. Additionally, multiple severe typhoons that hit coastal and southern China in July disrupted port operations, factory production and supply chain logistics, exacerbating the monthly decline.
The July manufacturing downturn comes as China’s broader economy has been grappling with persistent headwinds for months. A years-long downturn in the country’s massive property sector has eroded household consumer confidence, while stagnant wage growth and tight labor market competition have made consumers more cautious about discretionary spending. Sluggish domestic investment and consumer spending have further held back overall growth.
In the April-June second quarter, China’s economy expanded at an annual rate of 4.3%, the slowest year-on-year pace in more than three years. This result falls short of the Chinese government’s official full-year growth target of 4.5% to 5%, putting additional pressure on policymakers to roll out new stimulus measures.
Up to this point, robust export growth, particularly for high-tech goods such as semiconductors and electric vehicles, has been a key pillar supporting China’s overall economic momentum this year. But these sectors are highly capital-intensive, meaning they have generated limited new job growth to ease domestic labor market pressures.
China’s strong export surge has also sparked international trade tensions. The U.S. and other major economies have criticized Beijing for supporting excess industrial capacity across sectors from solar panels to electric vehicles through large state subsidies. These countries argue that as domestic demand slows in China, heavily subsidized cheap Chinese exports are flooding global markets, threatening manufacturing sectors and employment in other economies. Beijing has repeatedly rejected these claims.
Gary Ng, senior economist at French investment bank Natixis, noted that China’s current economic policy framework continues to prioritize productivity growth over expanding domestic household consumption, a structural dynamic that keeps the economy reliant on external demand.
Most economists forecast that China will continue to lean on export growth to prop up overall output for the remainder of 2024. At the same time, top Chinese policymakers have signaled a new push to boost domestic consumption: the ruling Communist Party’s Politburo, the top decision-making body, pledged Thursday to introduce new measures to lift household spending and support sluggish sectors of the economy.