China's factory activity contracts for second month

China’s manufacturing activity shrank for a second straight month in August, though at a slower pace than expected, keeping pressure on Beijing to step up economic support as growth momentum weakens.

The official purchasing managers’ index (PMI) came in at 49.8, up from 49.2 in July, according to data released Monday by the National Bureau of Statistics. That beat the median forecast of 49.6 from economists polled by Reuters. Any reading below 50 signals contraction, so the modest improvement suggests factory activity is still shrinking, but less severely.

The slowdown reflects deeper strains across China’s economy. Growth slipped to 4.3% in the second quarter, the weakest since late 2022, as weak domestic demand and a prolonged property market slump drag on activity. Retail sales, industrial output and urban investment all weakened further in July, with industrial profits cooling to their slowest gain this year. Exports have been a rare bright spot, logging double-digit growth for most months in 2024 thanks to strong global demand for Chinese-made tech gear tied to AI infrastructure spending.

Economists expect a mild rebound in the coming months as adverse weather fades and local governments speed up fiscal spending. Tianchen Xu, senior economist at the Economist Intelligence Unit, said Beijing is likely to accelerate infrastructure projects to offset the sharp drop in urban investment. “This should fast-track project approval and fund disbursement,” Xu said. Still, he warned the full impact may not show until later this year, with signs of recovery only just appearing in domestic demand.

The August PMI showed supply and demand both ticking up, with production and new orders sub-indexes rising above 50 for the first time since March. New export orders also rebounded to 50.1, signaling tentative improvement in overseas demand despite ongoing global uncertainty. But raw material inventories and employment remained in contraction, and high-tech sectors like electronics and machinery outperformed, while consumer goods lagged. The rebound in factory-gate prices, driven by higher global commodity costs, suggests mild inflationary pressures ahead. Nguyen Hoang Nam, China economist at Capital Economics, said firms are cautiously optimistic, expecting further support from government spending through year-end.