China’s manufacturing activity shrinks in July

Firms were positive demand will pick up in the coming year.

Operating conditions across mainland China’s manufacturing worsened for the first time in three months in July on the back of sluggish demand locally and abroad, according to a recent industry survey.

The Caixin China general manufacturing purchasing managers' index (PMI) dipped to 49.2 last month from 50.5 in June, signalling deterioration in the overall health of the sector for the first time since April when the index hit 49.5.

So far this year, the latest reading marked the third time China’s PMI fell below the 50.0 neutral threshold that separates contraction from expansion.

The survey, compiled by S&P Global, showed the headline figure was dragged down by a “marginal fall” in production and fewer new businesses received by Chinese manufacturers both at home and overseas.

“Notably, new export orders fell sharply in July, as risks of an overseas recession mounted, and China’s external demand was clearly insufficient,” said Wang Zhe, senior economist at Caixin Insight Group. “The gauge for new export orders (plunged) to the lowest since September.

Muted demand prompted companies to scale back production for the first time since January, as well as slow down in their purchasing activity. Their stocks of inputs and finished products both grew slightly last month.

To cope with the weak operating conditions, reduce costs and boost efficiency, layoffs across China’s factories extended for the fifth straight month in July.

Lack of stocks in some vendors dampened overall supplier performance which worsened last month for the first time since January.

Input costs, meanwhile, continued to fall for four months in a row, resulting in further cuts in average output prices.

Despite the slump and lingering concerns on challenging business conditions, Chinese manufacturers remained optimistic that output will pick up in the next 12 months.