China’s factory activity slows as both PMI gauges weaken in July

China's manufacturing sector showed fresh signs of fragility in July, with the official purchasing managers index slipping into contraction territory for the first time in five months while a private gauge fell to a four-month low, reinforcing concerns that the world's second-largest economy faces a more pronounced deceleration in growth.

Dual Gauges Flash Warning Signs

The official manufacturing PMI, released on Friday, fell to 49.2 from 50.3 in June, marking the first reading below the 50-point threshold separating expansion from contraction since February. The decline was steeper than the market consensus of 50.0, driven by shrinking new orders and elevated production costs.wsj+1

On Monday, the RatingDog China General Manufacturing PMI, compiled by S&P Global ↗ 1.05%, came in at 50.9, down from 51.7 in June and below analysts' forecasts. While the private survey remained in expansion territory, growth in output and new orders eased to four-month lows. New export orders returned to growth after contracting in May and June, though the increase was marginal.reuters+1

The non-manufacturing PMI also declined to 49.0 from 50.2 in June, marking the first contraction in two months and adding to the breadth of the slowdown.businesstoday

Geopolitical and Structural Headwinds

The weakness comes against the backdrop of a five-month-long conflict in the Middle East that has disrupted shipping through the Strait of Hormuz and sent manufacturers' energy costs higher across Asia and Europe. Second-quarter GDP growth slowed to 4.3%, its weakest in more than three years and below the lower end of Beijing's 4.5% to 5.0% full-year target.freemalaysiatoday+1

Manufacturers added staff for a second straight month at the fastest pace since August 2023, a bright spot in an otherwise downbeat report. Input price inflation eased to a six-month low, while output prices were broadly flat.reuters+1

Fiscal Response in Focus

Louise Loo, head of Asia economics at Oxford Economics, said Beijing is preparing to deploy unspent government finances, describing the second half of 2026 as "game time" for fiscal policy. China's leaders pledged at a late-July meeting to accelerate spending on already-budgeted infrastructure projects rather than introduce major new stimulus. Standard Chartered has also warned that growth momentum is softening, suggesting the annual target may require additional policy support.cnbc+2

With the general PMI at its lowest since late 2022, the coming months will test whether Beijing's incremental approach can arrest the slide.businesstoday