China's manufacturing sector returned to contraction for the first time in five months. Analysts said concerns about an economic slowdown have grown again as exports, which had driven the recovery, lost momentum. With the Communist Party's Politburo hinting at the possibility of currency easing, markets see a chance that stimulus measures such as a rate cut could come within the year.
China's National Bureau of Statistics released the manufacturing purchasing managers index (PMI) for July on the 31st. A PMI above 50 signals expansion and below 50 indicates contraction. This month's manufacturing PMI fell to 49.2 from 50.3 in June, the lowest in five months since February (49.0). It was well below Reuters' forecast of 50.
The non-manufacturing PMI, which includes services and construction, fell to 49 from 50.2 in June. The composite PMI dropped to 49.3 from 50.6 over the same period.
This is analyzed to reflect the recent slowdown in exports. According to CNBC and Bloomberg, China's manufacturing had been recovering thanks to a "front-loading of exports," as corporations brought forward orders ahead of the United States' additional tariffs in July.
However, as this effect weakened this month, export growth slowed, which in turn directly affected manufacturing activity. According to China Beige Book, China's exports slowed in July, and related manufacturing activity and hiring were also sluggish. Retail sales in July were also reported to have declined.
◇ Politburo meeting hints at currency easing… "Possibility of a rate cut in the third quarter"
Markets are watching the possibility that the Chinese government will respond with stimulus measures such as cuts to the reserve requirement ratio (RRR) and policy rates.
At its meeting on the 30th, the Communist Party's Politburo discussed the direction of economic management for the second half and said it would "comprehensively use currency policy tools and adjust them in a timely manner." According to China Business News, this is seen as a step forward from the April meeting's phrasing that it would "strengthen the pre-emptiveness, flexibility and precision of currency policy." In particular, the words "use" and "adjust" are analyzed to suggest that the policy has entered the implementation stage.
The Politburo also said it would "integrate fiscal and financial policies to expand domestic demand," a point emphasized for the first time at this meeting, which is widely seen as increasing the likelihood of expanded policy combinations such as "interest subsidies + People's Bank of China re-lending." The aim is to maximize demand stimulus by combining credit support through fiscal measures with funding supply from the financial sector.
Dong Ximiao, chief economist at Zhaolian Finance, said, "Policy tools have already entered the preparation stage, and actual implementation will be decided based on domestic and external economic conditions, prices and financial market conditions," noting there is a possibility of RRR and rate cuts in the third quarter. Wang Qing, chief macroeconomic analyst at Dongfang Jincheng, also said, "There is a possibility that effective additional stimulus, including RRR and rate cuts and an expansion of currency policy, will be announced around the end of the third quarter."