China manufacturing weakens as economy slows and tariffs bite


Chinese factory activity has taken another step down, hit by a combination of a slowing domestic economy, the imposition of US tariffs and poor weather.

Key points:

  • Activity in Chinese factories slowed in July
  • A weaker Chinese currency offset damage from US tariffs, but new export orders still shrank
  • Chinese authorities are likely to further ease lending rules and boost infrastructure spending to support domestic economy

The official manufacturing Purchasing Managers’ Index fell more sharply than expected in July, although overall manufacturing activity expanded slightly.

The PMI dropped from 51.5 to 51.2, with a reading of 50 separating expansion from contraction.

Readings of both output and new orders both fell, pointing to a slowing domestic demand.

Perhaps surprisingly, the measure of export orders was relatively steady in one of the first measures since the US escalated its trade dispute with China and broadened its tariff regime.

However new export orders did remain in contractionary territory.

Falling yuan offsets US tariffs

Capital Economics’s Julian Evans-Pritchard said it appears the impact of the first tranche of US tariffs that came into effect this month is being largely offset by a weaker Chinese currency.

“Instead, weaker domestic demand appears to be to blame for the lower PMI reading — the import component fell to a 23-month low and the price indices point to an easing of producer price inflation in July,” Mr Evans-Pritchard said.

While the official PMI tends to be heavily weighted to large state-owned enterprises, tomorrow’s Caixin PMI will give a more complete picture with its focus on small-to-medium enterprises.

The National Bureau of Statistics’ surveys for both construction and services sectors also pointed to a slowing domestic economy, with the non-manufacturing PMI hitting an 11-month low.

ANZ Senior China Economist Betty Wang said while trade tensions were a factor in the moderation in growth, the ongoing deleveraging campaign and unfavourable weather were bigger drivers behind the slowdown.

Ms Wang said while Chinese authorities have eased credit conditions on the banks recently, a step up in infrastructure investment was likely in coming months.

“While this is likely to lift domestic sentiment over the medium term, we are mindful of whether China will shift back to pump-priming the economy,” she said.

Ms Wang said the figures pointed to a soft start to China’s third quarter GDP number, with a risk annualised growth may now slip below 6.5 per cent.

By Stephen Letts


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