China’s factory activity unexpectedly contracted in July while property sales continued to shrink, highlighting the fragility of the economy’s recovery amid sporadic Covid outbreaks and adding to calls for more policy stimulus to fuel growth.
The official manufacturing purchasing managers index fell to 49 from 50.2 in June, the National Bureau of Statistics said Sunday, dropping below the 50-mark that indicates a contraction in activity. A private survey on Monday also showed a weakening in factory production, while separately, data from China’s top 100 property developers showed the housing market continued to slump last month.
The economy’s recovery remains fragile as the government sticks to its strict Covid Zero approach of tightening restrictions when virus outbreaks occur. A recent flareup in the southern manufacturing hub of Shenzhen impacted factory operations there, raising concerns about disruptions to global supply chains.
“The slowdown was led by production and new orders, signaling disruptions to supply and unstable domestic demand recovery,” said Liu Peiqian, chief China economist at NatWest Group Plc. “Covid-related policies continue to dampen the momentum of recovery and more easing policies are needed to stabilize the domestic demand in coming months.”
The Caixin manufacturing PMI, based on a survey of mainly smaller and privately-owned businesses, also showed a weakening in sentiment. The index dropped to 50.4 last month from June’s 51.7, missing the median estimate of 51.5 but staying above the 50 dividing line, Caixin and S&P Global said in a statement Monday.
The yield on China’s 10-year government bond fell 2 basis points to 2.73% as of 10:37 a.m., set for the lowest since late May, while futures on notes of the same tenor rose as much as 0.2% to a fresh high since February 8.
GDP growth in the second quarter was the slowest since the initial Wuhan outbreak, and economists expect full-year expansion could reach just 4% or below this year. With the property market continuing to weigh on the growth outlook, economists say the need for more policy stimulus remains strong.
The Communist Party’s top decision makers last week signaled a softening on the government’s growth target of around 5.5%, although they failed to announce any new stimulus policies to boost the recovery.
Citigroup Inc. economists including Yu Xiangrong wrote in a note that the property market and fiscal policy are the top two venues for stimulus in the coming months.
The government has also sped up infrastructure spending to help spur growth in the second half. China’s state economic planner said the acceleration of construction of major infrastructure projects can provide important support for stabilizing the economy. The third quarter is a critical window of economic stabilization and recovery, it said.
The PMI data showed the sluggishness in manufacturing was broad-based, with activity among large, medium and small sizes all contracting. The non-manufacturing PMI, which measures activity in the construction and services sectors, continued to expand, although at a weaker pace.
The NBS cited various reasons for the slide in manufacturing, including seasonal factors and a drop in high-energy consuming industries. New orders and new export orders for both manufacturing and non-manufacturing all contracted in July.
“Insufficient market demand is the main difficulty faced by manufacturing enterprises at present, and the foundation for the recovery of manufacturing industry needs to be consolidated,” the bureau said in a statement.
What Bloomberg Economics Says...
China’s recovery is sputtering after only a short spurt in the wake of Shanghai’s reopening. A surprise drop in July’s official manufacturing PMI into contraction more than reversed June’s rise -- underlining an abrupt loss of momentum. Scattered Covid-19 outbreaks and fresh strains in the property sector are clearly taking a toll on the economy.
Chang Shu and David Qu
On the Caixin PMI, Wang Zhe, a senior economist at Caixin Insight Group, said the data indicates “a slowing recovery,” with electricity shortages and Covid oubreaks “among factors that cut into market demand and confidence in July.”
The housing market continues to weigh on China’s outlook. Sales at China’s top 100 developers fell 39.7% from a year earlier, only narrowing slightly from a drop of 43% in the previous month, according to data released by China Real Estate Information Corp.
“Missing the annual growth target this year is almost certain,” NatWest’s Liu said. “Therefore the focus should instead be if and how China would be able to stabilize its growth closer to long term potential in the second half of the year.”
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