China manufacturing PMI falls amid steep drop in export orders

Factory sector activity in China was at its slowest in eight months in July, as export orders declined at the quickest pace seen in 25 months.

Caixin's manufacturing sector Purchasing Managers' Index printed at 50.8 for July, which was worse than a reading of 51.0 for June and economists' forecasts for it to remain at that level with a gauge for export orders falling from 48.8 to 48.4.

The survey compiler also said growth in new orders had weakened for a second month, falling below its historical trend.

"In general, the survey signaled a weakening manufacturing trend as a grim export market dragged on the sector's performance. The positive drivers were the increase in stocks of purchases and easing pressure on capital turnover," said Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group.

For its part, Caixin added that "data suggested that reduced external demand contributed to the slowdown, as exports fell for the fourth month in a row. Notably, the rate at which new export business declined was the quickest recorded for just over two years amid reports of subdued market conditions."

Hiring levels also continued to slip, sometimes in response to company downsizing, although the decline in the rate of job losses had eased since June.

Combined with further growth in new orders, lower staff levels had resulted in higher order backlogs, Caixin also said.

Average input costs on the other hand were reported to have risen "solidly" with increases widely linked to higher prices for raw materials, although at the factory gate prices rose at their slowest pace for three months.

Similarly, companies generally expected their output to rise over the coming 12 months, but positive sentiment in that regard remained close to June's six-month low and "weak" in comparison to historical levels.

"On balance, today’s data suggest that the June decline in the China Activity Proxy – our in-house measure of GDP growth – probably extended into July, consistent with our view that China’s economy is on track to slow this quarter and next. We see increasing headwinds to the manufacturing sector from the recent slowdown in credit growth," said Julian Evans-Pritchard at Capital Economics.

"US tariffs will also be a drag, weighing on investment and foreign demand."