China’s economic recovery showed tentative signs of stabilisation in August but the latest purchasing managers’ index (PMI) data pointed to a fragile outlook with manufacturing activity improving while the services sector remains under pressure from weak domestic demand.
The manufacturing PMI rose to 49.8 in August from 49.2 in July, beating the market and ING Economics’ expectations of 49.5. However, the index remained below the 50-point threshold that separates expansion from contraction for the second consecutive month, underscoring the absence of a broad-based recovery in industrial activity.
The mixed PMI reading suggests that China’s industrial sector may have stabilised somewhat in August after a weaker-than-expected performance in July. However, economists cautioned that the improvement is unlikely to mark the beginning of a significant economic turnaround particularly as domestic demand remains subdued and growth momentum continues to lose strength.
According to Lynn Song, Chief Economist, for Greater China at ING Economics, the August PMI figures ‘flashed mixed signals’, with manufacturing rebounding while the non-manufacturing PMI remained stagnant. The data indicate that industrial activity could post a modest improvement in August, but a major acceleration in overall economic growth remains unlikely.
Manufacturing shows signs of stabilisationThe improvement in the manufacturing PMI was supported by a recovery across several of its key components. Production, new orders and new export orders all moved back into expansionary territory during August.
The production sub-index rose above the 50-point threshold to 50.4, while the new orders index climbed to 50.6. New export orders also returned to expansion, reaching 50.1. The improvement across these indicators provides some evidence that factory activity and demand for manufactured goods strengthened during the month.
The development is particularly significant following weaker-than-expected industrial production data in July. The latest PMI readings suggest that industrial output could register a modest uptick when official August industrial production figures are released in the coming weeks.
However, the manufacturing recovery remains relatively fragile. The headline PMI has stayed below 50 for two consecutive months, indicating that the improvement in individual components has yet to translate into a sustained expansion of the broader manufacturing sector.
Price indicators also showed signs of renewed pressure. Ex-factory prices rebounded to 50.4, marking their first expansion in three months. At the same time, raw material prices rose sharply to 56.6, their highest level in three months.
The increase in raw materials prices could provide some relief to industrial producers by reducing deflationary pressure on factory-gate prices. However, it could also raise input costs in manufacturers, particularly if stronger commodity and raw material prices are not accompanied by a corresponding improvement in final demand.
For China’s industrial economy, the combination of recovering production and new orders with elevated raw material costs therefore remains a mixed development.
Services sector remains a major weaknessWhile manufacturing showed tentative improvement, the non-manufacturing sector continued to struggle.
China’s non-manufacturing PMI remained unchanged at 49.0 in August, falling short of market and ING Economics expectations of 49.4. The reading indicates that activity in the non-manufacturing sector remained in contraction for another month.
More concerning was the performance of new orders. The new orders sub-index fell to 44.1, its lowest level in 44 months, highlighting the weakness in demand facing businesses outside the manufacturing sector.
Orders on hand also deteriorated, declining to 42.8, a four-month low. The weakness in both new orders and outstanding orders suggests that businesses continue to face subdued demand and limited visibility over future activity.
New export orders remained unchanged at 47.0, while employment also stayed at a low level of 45.4. The persistent weakness in employment provides another indication that businesses remain cautious about expanding capacity or increasing payrolls.
The services sector is particularly important for understanding the state of China’s domestic economic because much of its activity is driven by household and domestic demand rather than exports. The continued weakness in services therefore points to sluggish domestic consumption and a lack of sufficient domestic momentum.
Policy support faces a testThe latest PMI data also raise questions about the effectiveness of recent policy measures aimed at supporting economic activity.
Chinese authorities have announced a number of measures in recent months to bolster growth, with the latest policy support appearing to focus largely on interest subsidies. However, the immediate impact of such measures could remain limited, particularly if households and businesses remain cautious about borrowing and spending.
The weakness in non-manufacturing new orders suggests that monetary and financial support alone may not be sufficient to generated a meaningful revival in domestic demand.
Economists therefore expect additional policy measures to be announced in the coming weeks as policymakers seek to reinforce growth momentum and prevent the economy from losing further traction.
A more comprehensive policy response could become increasingly important if the weakness in domestic demand persists. While lower financing costs can support investment and borrowing a sustained improvement in consumption and private-sector confidence many require stronger measures aimed directly at household spending employment and business confidence.
Industrial recovery remains modestThe divergence between manufacturing and non-manufacturing activity is one of the most notable features of the August PMI data.
The recovery in production and new orders indicates that factories may be benefiting from improving external demand and stabilising industrial conditions. The return of new export orders to expansion territory is particularly encouraging for manufacturers that remain reliant on overseas markets.
However, the deterioration in services-sector new orders points to a different problem: insufficient domestic demand.
This divergence means that stronger industrial activity alone may not be enough to deliver a sustained acceleration in China’s overall economic growth. Manufacturing can provide support through exports and investment, but a durable recovery requires stronger household consumption and services activity.
The weak non-manufacturing PMI also highlights the challenge facing policymakers as they attempt to rebalance growth towards domestic demand. If consumers remain cautious and businesses continue to defer spending and hiring decisions, the impact of policy stimulus could remain muted.
Outlook remains cautiousThe August PMI data provide some reassurance that China’s industrial slowdown may be stabilising but they do not yet point to a decisive change in the country’s growth trajectory.
The rise in the manufacturing PMI to 49.8, combined with expansion in production, new orders and new export orders, suggests that industrial activity could improve modestly in August. This could translate into a somewhat stronger industrial production reading compared with July.
Nevertheless, the manufacturing PMI remains below 50, while the non-manufacturing PMI is stuck at 49.0. The sharp decline in services-sector new orders is particularly concerning and indicates that domestic demand remains the principal weakness in the economy.
The increase in raw material and input prices also warrants monitoring. While rising prices could ease deflationary pressures that have weighed on corporate revenues and profitability, they could simultaneously squeeze margins if downstream demand fails to improve.
For policymakers, the immediate priority will therefore be to strengthen domestic demand while maintain support for industrial activity. The latest data suggest that further policy intervention may be required to generate a more broad-based recovery.
For industrial and commodity markets, China’s uneven economic performance will remain an important factor. A modest improvement in manufacturing could provide some support to demand and industrial commodities and energy, but persistent weakness in services and domestic consumption could limit the upside.
Overall, China’s August PMI readings point to an economy that is stabilising rather than accelerating. Manufacturing has regained some momentum, but the services sector remains weak and domestic demand continues to lag. Until the improvement becomes broader and more sustained, expectations of a strong Chinese economic rebound are likely to remain restrained.
DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com
