China's August manufacturing PMI tops consensus yet remains in contraction

After July's sharp decline, the manufacturing PMI reading came in better than anticipated, providing a measure of relief. The consensus beat is likely to help sentiment for Chinese assets and commodity-linked currencies improve modestly, despite the index staying under the 50 threshold that marks expansion. The non-manufacturing PMI held steady at 49.0, tempering the positive manufacturing data by confirming that services and construction have not stabilised, which aligns with recent figures showing waning consumer spending and urban investment. The composite PMI's slight rise to 49.5 will probably be interpreted by markets as a sign of a slower contraction rather than a recovery, maintaining pressure on Beijing to provide the fiscal and monetary support that officials have signaled, though economists warn the scale of any such measures will probably be limited. As exports stay among the few resilient sectors, focus will shift to whether AI infrastructure-driven demand for Chinese tech products can keep compensating for weak domestic consumption in the coming months.

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Chinese factories remain in contraction, though by less than economists had predicted, keeping the pressure on Beijing to support a slowing economy.

Summary:

• In August, China's official manufacturing PMI climbed to 49.8 from 49.2 in July, exceeding the Reuters poll median of 49.6, yet it stayed below the 50-point expansion line for the second month running.
• The official non-manufacturing PMI, which covers services and construction, was flat at 49.0 for the second consecutive month.
• The composite PMI inched up to 49.5 from 49.3 in July.
• China's economy faces increasing pressure, with second-quarter GDP growth decelerating to 4.3%, the slowest since late 2022, due to weak domestic demand and a drawn-out property downturn.
• July saw retail sales and industrial output both decelerate, unemployment edge up, and industrial profit growth ease to this year's slowest rate.
• Exports have stayed a bright spot, recording double-digit growth for most of the year thanks to a global AI infrastructure spending surge boosting demand for Chinese tech products. Policymakers have promised additional fiscal and monetary support, but economists expect the scale to be limited.

According to an official survey released Monday, China's factory activity picked up in August yet stayed in contraction for a second month, reinforcing indications that economic momentum has slowed due to persistently weak domestic demand. The National Bureau of Statistics' manufacturing PMI increased to 49.8 from 49.2 in July, surpassing the Reuters poll median of 49.6, but still below the 50-point threshold that distinguishes expansion from contraction.

The non-manufacturing PMI, covering services and construction, stayed at 49.0 without any gain from July, indicating that the manufacturing recovery has not spread to the wider economy. The composite PMI, combining the two measures, rose slightly to 49.5 from 49.3, a small increase that still leaves the overall indicator in contraction.

The figures emerge amid growing strain on China's economy, as second-quarter growth slowed to 4.3%, the weakest since late 2022, with soft domestic demand and a protracted property market slump continuing to drag on activity. The weakness intensified in the second half of the year, as consumer spending stalled, urban investment contracted more quickly, and unemployment edged up. Retail sales and industrial output both decelerated in July, while industrial profit growth cooled to its slowest this year.

Exports continue to be one of the few growth pillars, partially offsetting the drag from weaker domestic conditions as a global AI infrastructure spending boom boosts demand for Chinese tech goods, with outbound shipments registering double-digit growth for most of the year. Chinese policymakers have committed to introducing new support measures in a timely fashion and have indicated room for additional fiscal spending and monetary easing, but economists caution that the size of any such support will probably remain limited due to the structural nature of the property and demand-side challenges.