China’s July manufacturing activity contracts more than expected

BEIJING — China’s official gauge for manufacturing activity on Thursday pointed to a worse-than-expected contraction in July amid slower economic growth and ongoing U.S. trade tensions.

The Manufacturing Purchasing Managers’ Index for July was 49.3, missing expectations for 49.7 according to a Reuters poll.

China’s official manufacturing PMI has been below the 50 mark, reflecting contraction rather than expansion, since April.

“The PMI is lower due to weather challenges, as well as shifting some orders to lower-tariffed countries such as Vietnam,” said Cameron Johnson, Shanghai-based senior partner at consulting firm Tidalwave Solutions.

Overall export figures are expected to remain stable for the next quarter, Johnson said, noting that some production will be shifted to other countries to take advantage of lower tariffs until China sets its duty rates with the U.S.

Tensions between the world’s two largest economies escalated in April with each side imposing tariffs of more than 100% on imports of goods from the other. The two sides agreed in May to roll back most of the additional duties for 90 days, bringing the effective rate for China exports to the U.S. to around 43%.

The truce is set to expire in mid-August. Representatives from the world’s two largest economies ended a meeting in Stockholm this week without announcing an extension of the agreement, which had been widely expected.

Earlier in July, the U.S. reached a deal with Vietnam that imposed a 40% tariff if the goods were made elsewhere and were only transferred to the Southeast Asian country for sale to the U.S. Goods made in Vietnam will otherwise face a 20% tariff when shipped to the U.S.

Within China’s latest manufacturing PMI, sub-indexes showed that employment, new orders and raw materials inventory also contracted in July. The index for jobs ticked up to 48, from 47.9 in June, while that for new orders fell to 49.4, down from 50.2 in June.

The National Bureau of Statistics attributed the manufacturing PMI decline in July to the traditional off-season and factors such as extreme heat and torrential rain in parts of the country.

In one of the latest instances of extreme weather, at least 30 people died this week on the outskirts of Beijing after the city issued the highest-level red alert for heavy rain, according to state media.

In July last year, the official manufacturing PMI read was 49.4, with the new orders sub-index at 49.3.

Besides the poor weather, Beijing’s “anti-involution” efforts to address overcapacity problems are impacting the economy, Goldman Sachs analysts said in a note following the release of the PMI data.

“The manufacturing PMI featured lower output, lower inventory but higher price sub-indices, whereas the construction PMI fell notably on high temperatures and heavy rainfalls,” the analysts added.

The official non-manufacturing PMI, which measures activity in services sectors such as tourism, fell to 50.1 in July, down from 50.5 in June, Thursday’s data release showed.

The decline in both manufacturing and services PMI for July aligns with expectations of a growth slowdown in the second half of the year, since GDP in the first six months was mainly supported by businesses ramping up orders ahead of tariff uncertainty, said Qin Yong, chief economist at the treasury department of Sumitomo Mitsui Banking Corporation (China). He was speaking Thursday on CNBC’s “The China Connection.”

There’s little incentive for businesses to ramp up orders again, regardless of the outcome of trade talks, he said. “So then the tariff impact on China’s economy will become very apparent from August onwards … considering the PMI for July, I would say there are some very worrying situations right now.”

During a high-level Politburo meeting on Wednesday, China’s top leaders did not signal plans for substantial new stimulus, although the country has been ramping up subsidies to encourage people to have more children.

If the U.S. and China are able to extend the trade truce, that will likely ‘reduce the urge to step up policy support” for the economy, Bank of America analysts said in a report Wednesday about the Politburo meeting.

They pointed out that the meeting readout removed references to interest rate cuts and offered little hint of additional property market support, while emphasizing local government debt risks.

— CNBC’s Anniek Bao and Victoria Yeo contributed to this report.