(Bloomberg) -- China’s manufacturing activity unexpectedly shrank for the first time in nine months in July, a private survey showed, a sign the country’s export machine might be cooling, darkening the economy’s outlook.
The Caixin manufacturing purchasing managers index fell to 49.8 last month from 51.8 in June, according to a statement released by Caixin and S&P Global Thursday. It missed the median forecast of 51.5 and was the first time since October the gauge dropped under 50, which indicates contraction.
The private measure likely reflects weakening momentum in overseas shipments as it focuses on small and export-oriented firms. The bearish reading is another warning sign for a rare bright spot in the No. 2 economy after an official measure showed factory activity shrank for a third straight month in July.
“We have seen stronger performance in the Caixin reading, probably driven by better performance of smaller exporters. The decline of that today suggests there could be some risks of softer export momentum,” said Michelle Lam, Greater China economist at Societe Generale SA.
A benchmark index of Chinese onshore stocks slid as much as 0.4% after the surprising data miss, reversing a rally on Wednesday driven by rising stimulus hopes. The Hang Seng China Enterprises Index also lost as much as 0.7% before trimming some losses.
China’s economy has been bolstered by robust exports and industrial production this year as consumption remains subdued amid a persisting housing slump. The uneven nature of the recovery has prompted calls for measures to stimulate spending to maintain growth.
Total new orders declined for the first time since July last year and the growth in export orders slowed, the Caixin survey suggested.
“The most prominent issues are still insufficient effective domestic demand and weak market optimism,” Wang Zhe, senior economist at Caixin Insight Group, said in a statement accompanying the data release.
The downturn contrasts with other parts of Asia including Taiwan, South Korea and Vietnam, which saw their manufacturing activities expand in July, according to factory surveys.
What Bloomberg Economics Says...
China’s Caixin July manufacturing PMI captures the economy’s weakness, but overstates the pace of the deterioration. Over the past few months we’ve been saying that the survey hasn’t fully reflected the recovery’s softness. Now the reading has caught up with signals from the official PMI.
— Chang Shu and David Qu, economists
Read the full report here.
China’s top policymakers pledged to make boosting consumer spending a greater focus in a Politburo meeting in July, vowing to roll out new measures to support the economy, without elaborating. Sluggish consumer demand has already stung global brands from US coffee chain operator Starbucks Corp. and French beauty giant L’Oréal SA to Japan’s Fast Retailing Co., sending sales diving and weighing on stock valuations.
The Chinese central bank is likely to further reduce banks’ reserve requirement ratio and interest rates as early as this quarter, state media Securities Daily reported Thursday, citing analysts. An increasingly likely rate cut by the US Federal Reserve in September would ease pressure on the yuan and leave the People’s Bank of China more policy room.
China’s cabinet also released a five-year plan this week to boost its urbanization rate to as much as 70%, which could help increase productivity and consumption. That figure stood at about 66% at the end of 2023, according to the statistics bureau.
Chinese factories are facing rising external uncertainties as regions including the EU move forward with tariffs on goods from the country such as electric vehicles. Former US President Donald Trump’s threat to impose duties of 50% or more on Chinese imports if he returns to the White House has prompted many local plants to front-load shipments, boosting activity gauges in previous months.
The Caixin results has been stronger than those from the official poll in every single month since October as exports stayed strong. The two surveys cover different sample sizes, locations and business types.
--With assistance from Zhu Lin.
(Updates with Securities Daily report.)
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