China factory output contracts less than expected in August

China’s manufacturing sector contracted for the second consecutive month in August, although the decline was shallower than market forecasts. The official purchasing managers’ index recorded a reading of 49.8, surpassing the 49.6 projected by economists polled by Reuters. This result follows a July reading of 49.2, indicating a slight improvement in factory activity. The data, released by the National Bureau of Statistics on Monday, suggests that the pace of economic slowdown is moderating, yet it maintains significant pressure on Beijing to implement further supportive measures as growth momentum continues to wane.

The broader economic landscape remains under considerable strain. Growth decelerated to 4.3 per cent in the second quarter, marking the weakest pace since late 2022. This slowdown is attributed to soft domestic demand and a prolonged slump in the property sector. The economic challenges intensified in the second half of the year, with consumer spending stalling, urban investment contracting at an accelerated rate, and unemployment figures rising. Additionally, retail sales and industrial output both slowed in July, while the growth rate of industrial profits cooled to its lowest level this year.

Despite these headwinds, exports have served as a critical pillar supporting growth. A global surge in artificial intelligence infrastructure spending has boosted demand for Chinese technology goods, helping to cushion the impact of external shocks. Outbound shipments maintained double-digit growth for most of the year. Economists anticipate improved growth in the coming months as adverse weather conditions subside and local governments accelerate fiscal spending. Tianchen Xu, a senior economist at the Economist Intelligence Unit, noted that policymakers are increasingly concerned about the collapse in urban investment. He expects Beijing to fast-track project approvals and fund disbursement to stimulate activity.

The August data revealed improvements in both supply and demand. Sub-indexes tracking production and new orders expanded to 50.4 and 50.6, respectively. New export orders rebounded to 50.1 from 49.6 in the previous month, signalling a recovery in overseas demand despite ongoing turmoil in the Middle East. However, raw materials inventory and employment sub-indexes remained in contractionary territory. High-tech equipment manufacturing outperformed the broader sector, with production and new orders for electronic machinery and computer communication devices exceeding 53. In contrast, consumer goods production lagged at 49. Nguyen Hoang Nam, a China economist at Capital Economics, observed that firms appear to be anticipating a boost to economic activity as local governments increase spending.

The non-manufacturing gauge, which monitors construction and services, remained unchanged at 49 per cent in August. The construction industry sub-index fell by 0.1 percentage points to 46.9 per cent, while activity in wholesale, retail, and capital markets services contracted. Improvements in factory-gate price sub-indexes point to renewed inflationary pressures, partly driven by higher global crude and metal prices. Zhiwei Zhang, president of Pinpoint Asset Management, suggested that rising commodity prices may have benefited upstream manufacturers, although these gains were driven by supply constraints rather than strong demand. The private RatingDog manufacturing PMI survey is estimated to show factory activity climbing to 51, with results due on Tuesday.