Manufacturing Demand Contracts Again, Revealing Pitfalls in Export-Driven Growth (AI Translation)

【周刊提前读】制造业需求重现收缩 警惕出口拉动不确定因素

In July 2024, China's manufacturing sector contracted for the first time in nine months, perpetuating the trend of supply surpassing demand. Conversely, the service sector saw increased expansion, although overall economic sentiment dipped to a nine-month low while still within the expansionary range [para. 1][para. 2]. The Caixin China General Manufacturing Purchasing Managers' Index (PMI) for July was 49.8, a drop of 2 percentage points from the prior month and below the boom-bust line for the first time in nearly nine months. Meanwhile, the Caixin China General Services Business Activity Index (Services PMI) rose by 0.9 percentage points to 52.1. This discrepancy between manufacturing and services led the Caixin China Composite PMI to fall by 1.6 percentage points to 51.2, the lowest since November 2023 [para. 2].

Wang Zhe, Senior Economist at Caixin Think Tank, highlighted that despite improved prosperity in the service industry, manufacturing remained under duress. Supply, demand, and employment in services were far stronger compared to manufacturing. The overall market optimism recovered slightly from June but remained generally low [para. 3]. Problems like insufficient effective domestic demand and weak market optimism remain prominent, calling for policies aimed at stabilizing growth, promoting employment, and stimulating market vitality [para. 3].

In July, the Caixin China Manufacturing PMI dropped into contraction, with significant declines in the production and new orders indices, both largely driven by domestic demand. The new orders index slumped into contraction for the first time since August 2023, and the new export orders index hit its lowest level for the year, although still above the contraction threshold [para. 4][para. 5]. Producer and demand slowdowns have kept the manufacturing employment index in contraction for 11 consecutive months, though the rate of contraction has moderated [para. 4][para. 5]. Due to weak demand, companies have cut down on purchases, leading the procurement volume index to fall below expansion for the first time in nine months. Continuing production expansion, the raw material inventory index dipped under the expansion threshold for the first time this year [para. 5].

Export growth faces uncertainties, with exports in July showing a year-on-year growth rate of 7%, below market expectations. The National Bureau of Statistics' Manufacturing PMI New Export Orders Index has been in contraction for three consecutive months [para. 6][para. 7]. This contraction in external demand reflects weak external factors dragging down exports [para. 6][para. 7]. Concerns about a U.S. economic recession and other risks highlight the importance of focusing on domestic economic circulation [para. 7].

The Caixin China Services PMI showed significant expansion during the peak summer travel season. The business expectations index rebounded but was still at its second-lowest since April 2020. After briefly contracting, the employment index reached its highest since September 2023 [para. 8].

In the second quarter of 2024, China's GDP grew by 4.7% year-on-year, just meeting the initial target of 5% for the first half of the year. The Central Politburo emphasized achieving annual economic and social development goals, stressing stronger macroeconomic policies and counter-cyclical adjustments [para. 9][para. 10][para. 11]. Wang Tao from UBS suggested that while the policy support would remain moderate, no new major stimuli are expected. Instead, efforts will focus on the accelerated implementation of existing support measures [para. 11].

Post-July, additional policies to stabilize growth included another reduction in the Loan Prime Rate. Joint efforts by the National Development and Reform Commission (NDRC) and the Ministry of Finance secured approximately 300 billion yuan for promoting the trade-in of old cars and home appliances [para. 12]. Measures like speeding up the issuance and use of special bonds suggest ample room for further policy enhancements [para. 13][para. 14]. Expectations of new measures in real estate, local debt resolution, and consumption promotion continue to remain high [para. 14].