China’s factory activity unexpectedly contracts in July

China's factory activity unexpectedly fell into contraction in July, snapping four straight months of expansion and underscoring a broad loss of economic momentum as the export boom that powered earlier growth began to fade.

The official manufacturing purchasing managers' index dropped to 49.2 from 50.3 in June, data from the National Bureau of Statistics showed on Friday, missing economists' median forecast of 50.0 and marking the first contraction since February 2026. A reading below 50 signals shrinking activity. The non-manufacturing PMI, covering services and construction, fell to 49.0 from 50.2, while the composite PMI declined to 49.3 from 50.6.investing+2

Export Engine Sputters

The weakness followed a period in which Chinese manufacturers had front-loaded shipments ahead of anticipated U.S. tariff increases. Exports surged 27% year-on-year in June — the fastest pace in nearly five years — as businesses rushed orders before President Donald Trump's Section 301 probes triggered additional levies after a 10% broad-based duty expired on July 24.cnbc+1

That tailwind now appears to be fading. "U.S.-bound shipments fell outright for the first time in several months," according to a survey by China Beige Book, which also found manufacturing posted its worst performance on employment as job growth deteriorated across all sectors.cnbc

Domestic Demand Remains the Weak Link

Sluggish household spending, a prolonged property downturn, and subdued business confidence have continued to weigh on consumption. Retail sales fell in July from both the prior month and a year earlier, China Beige Book found, with travel and restaurants seeing a sharp on-year downturn. China's economy expanded just 4.3% in the second quarter, the slowest pace in more than three years and below the lower end of Beijing's full-year target of 4.5% to 5%.investing+1

Pressure Builds on Beijing

The data landed a day after China's Politburo acknowledged "difficulties and challenges facing the economy" at its mid-year meeting, pledging to accelerate fiscal spending and roll out "incremental policies" to shore up growth in the second half. A Reuters poll of 31 economists ahead of the release had forecast the index would slip only to the 50.0 breakeven mark, making the actual reading a sharper disappointment than markets had anticipated.kelo+2

The AUD/USD pair, often viewed as a proxy for China's economic health, edged lower following the release.fxstreet