China Factory Activity Contracts For Second Month, Keeping Pressure On Beijing For More Stimulus

China's manufacturing sector contracted for a second consecutive month in August, although the decline was milder than expected, underscoring the fragile state of the world's second-largest economy and keeping pressure on Beijing to step up policy support.

The official manufacturing purchasing managers' index rose to 49.8 in August from 49.2 in July, according to data released Monday by the National Bureau of Statistics. The reading was stronger than the 49.6 median forecast in a Reuters poll but remained below the 50 mark that separates expansion from contraction.

The improvement offers some relief after a weaker July, but the sub-50 reading shows that China's factory sector has yet to regain sustained momentum. The data also point to a widening divide within the economy, with high-tech manufacturing performing significantly better than consumer-oriented industries.

China's broader growth outlook has weakened as domestic demand remains subdued and the prolonged property downturn continues to weigh on investment and household confidence. Gross domestic product expanded 4.3% in the second quarter, the weakest pace since late 2022.

The slowdown has become more visible in recent months. Retail sales and industrial production lost momentum in July, while the growth in industrial profits eased to its weakest level of the year. Urban investment has also contracted at a faster pace, while unemployment has edged higher.

The August PMI nevertheless contained some encouraging signals. The production sub-index increased to 50.4, while new orders rose to 50.6, indicating that both factory output and domestic demand moved back into expansion territory.

New export orders also recovered, reaching 50.1 from 49.6 in July. That suggests overseas demand is providing an important source of support for Chinese manufacturers even as domestic consumption remains weak.

Exports have been one of the strongest parts of China's economy this year, recording double-digit growth for much of the period. Demand linked to the global artificial-intelligence investment boom has helped support shipments of Chinese technology products and equipment, cushioning some of the pressure from weaker conditions elsewhere.

The resilience of high-tech manufacturing was particularly notable. Production and new-order readings for electronic machinery and equipment, as well as computer and communications equipment, exceeded 53. By contrast, consumer-goods production remained in contraction at 49.

That divergence highlights one of the central challenges facing Beijing: investment and production tied to strategic industries are holding up better than consumer demand. China's policymakers have sought to support advanced manufacturing and technology while also trying to revive household spending, but the latest figures suggest the latter remains harder to stimulate.

Employment and raw-material inventory sub-indexes remained below 50, pointing to continued caution among manufacturers and limited willingness to expand hiring and stockpiles.

There were also signs of higher price pressures at the factory level. The improvement in factory-gate price indicators came partly as global crude oil and metals prices increased. But economists cautioned that the price gains were not necessarily evidence of stronger underlying demand.

"The rise of commodity prices may have benefited some firms in the upstream manufacturing sector," said Zhiwei Zhang, president of Pinpoint Asset Management, adding that the increase was driven by supply constraints while demand remained weak.

Beijing is expected to increase fiscal support as local governments accelerate spending and policymakers respond to the sharp deterioration in urban investment.

Tianchen Xu, senior economist at the Economist Intelligence Unit, said policymakers were increasingly concerned about the collapse in urban investment and that stronger fiscal measures should "fast-track project approval and fund disbursement."

The impact of that spending, however, is likely to emerge more clearly from September and into the fourth quarter, Xu said.

Nguyen Hoang Nam, a Chinese economist at Capital Economics, said businesses appeared to be anticipating stronger economic activity as local governments increase spending during the remainder of the year.

The non-manufacturing sector offered less encouragement. The official gauge covering services and construction remained at 49 in August. Construction activity weakened further, with its sub-index falling 0.1 percentage point to 46.9.

Within services, wholesale, retail and capital-markets activity remained in contraction, bolstering concerns that domestic demand has not yet developed enough momentum to offset weakness in property and investment.

The next key indicator will be the private RatingDog manufacturing PMI, due Tuesday. Economists polled by Reuters expect the index, which has greater exposure to smaller and more export-oriented companies, to rise to 51. The private survey has historically produced a more positive reading than the official PMI.

Together, the August data indicate that China's manufacturing sector may be stabilizing rather than rapidly recovering. Improving production, new orders and export demand provide some support, but weak employment, subdued consumer activity and the property downturn continue to constrain the economy. The figures therefore strengthen the case for additional fiscal measures, particularly those capable of lifting household demand and private investment rather than relying primarily on industrial output and exports to sustain growth.