China: Official PMIs dropped notably in July

Research evidence excerpt

China: Official PMIs dropped notably in July

onomy naturally

reduces the urgency for an aggressive and sweeping stimulus.

The steep decline in the official manufacturing PMI

The official manufacturing PMI dipped into contractionary territory again in July, falling

sharply to 49.2, well below market expectations (Consensus: 50.1; Nomura: 49.9) and the

June reading of 50.3. Despite the steep decline, we do not think markets need to overread

it as a sudden deterioration in growth momentum, as the large swings in June and July

could merely be a result of substantial seasonal distortions at quarter-end and -start.

Indeed, the monthly average in June-July was 49.8, which is exactly same as the monthly

average in the first five months. The mid-year Politburo meeting already set a more

proactive policy tone for H2, and we do not think the distorted PMI in July will convince

Beijing to introduce a large stimulus package.

Like the headline reading, the PMI subcomponents are also heavily affected by quarter-

end distortions, making the interpretation of single-month reading less relevant. Therefore,

we also compare the monthly average of PMI sub-indices in June-July to their averages in

January-May to assess their underlying trends. In detail, production sub-index remained

well above 50 in June-July, albeit edging down slightly to 50.7 from 50.9 in January-May.

On the demand side, new orders inched down to 49.9 in June-July from 50.0 in January-

May, mainly weighed on by weakening domestic demand, as new export orders rose to

49.9 from 48.2 over the same period. The AI supercycle and rising global demand for

renewables are tailwinds for the export sector. We expect export growth to remain

elevated in July. Elsewhere, raw materials inventory and employment increased to 48.4