China's manufacturing sector declines in July as export demand weakens

Factories scaled back production for the second time in three months.

China's manufacturing sector slipped back into contraction in July as slowing domestic demand and falling exports prompted factories to scale back production for the second time in three months.

The country's Purchasing Managers' Index dropped to 49.5 from 50.4 in June, falling below the 50-point threshold that separates growth from decline.

The reading marked the second deterioration in three months and signalled only marginal weakness overall.

Manufacturing output declined after rising in June, representing just the second fall in production since October 2023.

Companies cited slower growth in new orders as the primary reason for cutting back factory operations, with many firms choosing to fulfil orders from existing stock rather than ramping up production.

New order growth slowed markedly, rising only fractionally overall. Whilst some manufacturers benefited from successful business development efforts and increased client enquiries in the domestic market, others reported that subdued external demand had negatively affected sales.

Export orders proved particularly challenging, contracting for the fourth consecutive month at a faster pace than in June. This decline highlighted ongoing weakness in global demand amidst persistent trade uncertainty.

The production slowdown prompted Chinese manufacturers to trim their workforce again in July, though the rate of job cuts was the gentlest in four months. Companies cited both falling production requirements and cost concerns as reasons for reducing headcounts.

Supply chain conditions continued to deteriorate, with manufacturers facing shipment delays and supplier shortages. Raw material costs increased for the first time in five months, contributing to the first upturn in average input prices since February.

Despite rising costs, fierce competition forced companies to lower their selling prices, underscoring the challenging market conditions. However, export charges rose at the fastest pace in a year due to higher shipping and logistics costs.

"Pricing power remained weak, with companies cutting their selling prices even amid a fresh rise in input costs," said Jingyi Pan, Economics Associate Director at S&P Global Market Intelligence.

There were some signs of cautious optimism, however. Business sentiment improved from June's levels, with manufacturers expressing hopes that better economic conditions and promotional efforts would boost sales over the coming year.

This improved outlook led companies to increase purchasing activity and build inventory levels in anticipation of future demand growth.

The mixed picture reflects China's ongoing economic challenges as the world's second-largest economy grapples with weak global demand whilst domestic consumption remains subdued.