China Manufacturing Sector Logs Unexpected Contraction

China's manufacturing sector fell into the contraction zone in July on renewed decline in new work and weak output growth, survey data from S&P Global showed on Thursday.

The Caixin manufacturing Purchasing Managers' Index fell to 49.8 in July from 51.8 in June. The reading was expected to drop moderately to 51.5.

The score suggested that conditions in the manufacturing sector deteriorated for the first time in nine months.

The official PMI survey, released earlier this week, showed that China's manufacturing sector continued to shrink in July. The factory PMI slid to 49.4 in July from 49.5 a month ago. At the same time, the non-manufacturing index fell to 50.2, but remained above the neutral 50.0 mark.

Manufacturing output expansion was the softest in the nine-month sequence during July. As a result, new orders fell for the first time in a year. Subdued demand conditions and reductions in client budgets led to the decrease in new work. Nonetheless, export orders continued to grow, albeit at slower pace.

Manufacturers' purchasing activity decreased for the first time since October 2023. This led to a renewed depletion of stocks of purchases.

On the other hand, stocks of finished goods increased again, partially driven by delays in outbound shipments. Average lead times for the delivery of inputs lengthened for the second straight month.

Employment dropped fractionally in July. Some firms added headcounts to cope with rising workloads, while some opted to cut staffing levels, anticipating lower production needs.

Regarding prices, the survey showed that selling prices decreased for the first time since May. Prices were reduced to support sales amid increased competition. Input cost inflation eased to the lowest in the current four-month sequence.

Finally, confidence among manufacturers remained positive in July. Despite the fall in new work, firms were positive that business development efforts and the launch of new products can help drive sales in the year ahead.

Caixin Insight Group Senior Economist Wang Zhe said the 4.7 percent economic growth in the second quarter makes the annual growth target of around 5 percent challenging. The economist said policy efforts should focus on stabilizing growth, improving employment, safeguarding people's livelihoods, intensifying policy stimulus, ensuring effective implementation of previous policies, and unleashing market vitality.

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