China's factory activity shrinks in July as demand falters, fuelling slowdown concerns
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FILE PHOTO: An employee works on the production line manufacturing pipe-fitting valves at a factory in Wenzhou, Zhejiang province, China, January 14, 2026. REUTERS/Josh Arslan/File Photo
By Yukun Zhang and Ryan Woo
BEIJING, July 31 (Reuters) - China's factory activity unexpectedly slipped into contraction in July, pressured by shrinking new orders that reinforced concerns over slowing economic growth, weak demand at home and elevated production costs.
Strong manufacturing and goods exports in the first half of the year have somewhat cushioned the Chinese economy from the Middle East oil shock and helped offset weaknesses in the property market and employment, but economic data released earlier this month showed that growth had lost steam.
The official manufacturing purchasing managers' index (PMI) fell to 49.2 from 50.3 in June, below the 50 mark separating growth from contraction and hitting a five-month low, according to a survey by the National Bureau of Statistics (NBS) released on Friday. It missed the median forecast for 50 in a Reuters poll.
The non-manufacturing PMI, which includes services and construction, also declined below the 50 mark from 50.2 the previous month. At 49, the measure in July was the weakest since December 2022.
The grim readings underscore the headwinds confronting the economy with growth already slowing in the second quarter despite solid external demand.
The PMI data showed that downward pressure on the economy had increased, said Zhang Liqun, an analyst with the China Federation of Logistics & Purchasing.
"The constraint from weak domestic demand on the release of production and supply capacity has become a prominent problem, and industries and companies are facing considerable challenges," Zhang said.
China's gross domestic product growth in the second quarter slowed to 4.3% from 5.0% in the first three months, below the official annual target of 4.5%-5%, adding pressure on policymakers to deliver stronger stimulus measures to shore up domestic demand and investment.
ECONOMIC IMBALANCES DEEPEN
The PMI data showed a sharp drop in demand, with the subindex for new orders sinking to 48.5 from 51.2 the previous month. The gauge for new export orders also contracted, coming in at 49.6 in July compared with 50.1 in June.
Dan Wang, China director at Eurasia Group, said demand from major markets such as the European Union had been affected by the conflict in the Middle East, as European buyers, fearing a possible recession, turned cautious.
The latest factory surveys also underlined the deepening imbalances in the economy.
Although the subindex for production also contracted, the 49.9 reading suggested firmer supply compared with demand.
Moreover, the gauges for equipment manufacturing and high-tech manufacturing were in expansionary territory, while those for consumer goods and energy-intensive sectors shrank.
The divergence highlights a two-speed economy, with high-tech industries riding the wave of the global AI spending surge even as traditional, domestically focused manufacturers struggle against sluggish consumer demand and mounting cost pressures.
The composite PMI came in at 49.3 compared with a 50.6 reading the previous month.
The NBS attributed the weak factory performance to a high base and a traditional off-season for some manufacturing industries.
The Politburo, China's top decision-making body, pledged in a meeting on Thursday to "attach great importance" to the difficulties and challenges in the economy, and said the government would leverage existing policies and roll out new policies in a timely manner.
It reiterated policy pledges for expanding domestic demand, but did not unveil specific new measures.
"We believe that the main area that could provide support might be on the fiscal side, where there was a commitment to accelerate fiscal expenditures," said Lynn Song, chief economist of Greater China at ING.
(Reporting by Yukun Zhang, Tina Qiao and Ryan Woo; Editing by Shri Navaratnam)
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