BEIJING (July 31): China's manufacturing activity slipped to a five-month nadir in July as factories grappled with falling new orders and low prices, an official survey showed on Wednesday, pointing to a grinding second half for the world's production powerhouse.

The National Bureau of Statistics (NBS) purchasing managers' index (PMI) contracted for a third month, easing to 49.4 from 49.5 in June, below the 50-mark separating growth from contraction, but just ahead of a median forecast of 49.3 in a Reuters poll.

Sentiment remains gloomy among manufacturers as domestic demand is increasingly under siege and external pressures from trade tensions loom large for China's US$18.6 trillion (RM85.72 trillion) economy, which grew more slowly than expected in the second quarter.

Producers reported factory gate prices were at their worst in 13 months, while employment stayed in negative territory, with its sub-index last expanding in February 2023 and pointing to a somnolent domestic economy and China's increasing reliance on exports for momentum.

Solace could not be found in July's new export orders sub-index, which contracted for a third month and suggested factory owners had continued to slash prices to propel outbound shipments.

Furthermore, hopes that strong exports would spark a broader economic recovery were dashed by extreme weather conditions, as flooding and high temperatures hurt production lines over July, NBS senior statistician Zhao Qinghe said.

Policymakers, however, have been seemingly slow to recognise the magnitude of the economy's mounting afflictions.

"The only silver lining is that the recent loss of momentum appears to have made officials more serious about turning up the gears of near-term policy support," said Gary Ng, assistant economist at Capital Economics, adding that it "should underpin a recovery in activity in the coming months."

Consumers have cut back spending on big-ticket items and shied away from premium-priced goods. Car sales, the biggest component of China's retail sales, fell for the third month in June. Starbucks, which has thousands of stores across its second-largest market, reported a 14% plunge in quarterly China sales as coffee drinkers gravitated to cheaper offerings.

Policymakers promised further stimulus to encourage low- and middle-income groups to spend more during a meeting of the top-decision making body of the ruling Communist Party on Tuesday, but stopped short of announcing specific steps.

Analysts said that measures to support household comsumption were unlikely to meaningfully boost the economic recovery.

China's state planner announced that half of the 300 billion yuan (RM191.03 billion) to be issued in ultra-long treasury bonds will be allocated to support a consumer trade-ins programme, but that amount is equivalent to just 0.12% of economic output and 0.3% of 2023's retail sales.

No major new stimulus

One of the main reasons people are not spending in China is 70% of household wealth is held in real estate, and house prices fell at their fastest pace in nine years in June.

That problem is compounded by the fact that the property sector used to constitute around one quarter of the economy, making it a key growth driver.

But the PMI's construction sub-index grew more slowly in July, pointing to diminishing demand for new apartments and other building projects.

The official non-manufacturing purchasing managers' index (PMI), which includes services and construction, slowed to 50.2 in July from 50.5 a month prior.

Analysts were divided over the extent to which policymakers would reconsider stronger stimulus as the economy continues to show few signs of a turnaround.

Wang Tao, UBS chief China economist and head of Asia economics, said further cuts to the amount commercial banks must hold in reserve and lower borrowing costs could be on the cards, but did not see policymakers picking up a new playbook.

"We expect modest policy support ahead in the rest of 2024, which may largely follow through previous policy settings in the past several months, but with no major new stimulus," she added.

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