China's factory, and services sectors show weakness; need for stimulus

China's factory, and services sectors show weakness; need for stimulus

China's manufacturing activity fell for a fourth straight month in July while the services and construction sectors teetered on the brink of contraction, official surveys showed on Monday, threatening growth prospects for the third quarter.

Construction sector activity for July was its weakest since COVID-19-related workplace disruptions dissipated around February, data from the National Bureau of Statistics showed.

The world's second-largest economy grew at a slow pace in the second quarter, as demand remained weak at home and abroad, leading the Politburo - a top decision-making body of the ruling Communist Party - to describe economic recovery as "tortuous."

The official manufacturing purchasing managers' index (PMI) inched up to 49.3 in July from 49.0 in June, staying below the 50-point mark that separates expansion from contraction.

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The last time that indicator pointed to contraction for more than three consecutive months was between May and October 2019, before the pandemic, suggesting that negative sentiment among factory managers had become especially persistent.

The non-manufacturing PMI, which incorporates sub-indexes for service sector activity and construction, dropped to 51.5 from June's 53.2. The sub-index for construction, a large employer amid a broader unemployment crisis, fell from a high of 65.6 in March to 51.2 this month.

"The sharp fall in construction activity is a worrying sign of a potential death spiral in the property sector," said Xu Tianchen, senior economist at the Economist Intelligence Unit.

"Meanwhile, we're seeing improvements in inventory levels, suggesting that with destocking nearing its end, China's manufacturing sector bottomed out in the second quarter," he added.

China's top leaders earlier this month pledged to step up economic policy support, focusing on expanding domestic demand, boosting confidence, and tamping down on risks, the Politburo, a top decision-making body of the ruling Communist Party, said.

China will implement macro adjustments to the economy "in a precise and forceful manner" and strengthen counter-cyclical adjustments, as the government sticks with prudent monetary policy and pro-active fiscal policy, the Politburo was quoted as saying.

While the PMI's sub-index for new orders contracted more slowly in July, the decline accelerated for the sub-indexes export component, reinforcing that economic recovery would be driven by domestic demand.

The sub-indexes' continued decline also "suggested further downward pressure for the coming months," said Dan Wang, chief economist at Hang Seng Bank China.

Many analysts say policymakers may be reluctant to deliver any aggressive stimulus to boost domestic consumption, however, due to worries about growing debt risks, despite the urgency of the task.

China announced further measures to bolster consumption on Monday, targeting areas such as electric vehicles, housing, and tourism, the State Council said.

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"Looking forward, policy support is needed to prevent China's economy from slipping into recession, not least because external headwinds look set to persist for a while longer," Julian Evans-Pritchard, head of China economics at Capital Economics, wrote in a note.

"Unless concrete support is rolled out soon, the recent downturn in demand risks becoming self-reinforcing."


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