China's manufacturing contracts in July dragging down Asia factories

By Bloomberg News

China’s manufacturing contracted in July, rippling through factories across Asia and signaling any turnaround in the region could still be far off.
 

The Caixin manufacturing purchasing managers index declined to a six-month low of 49.2 in July from 50.5 in June, below the key 50 level that marks a contraction, a private survey showed Tuesday. The official manufacturing PMI released Monday also showed a decline in China’s factory activity last month.  

China’s faltering recovery weighed on Asian manufacturing powerhouses, especially in North Asia. Taiwan’s PMI slid to an eight-month low of 44.1, while Japan’s dipped slightly to 49.6, according to S&P Global and au Jibun Bank. 

 

The PMI readings cloud the outlook for Asia, which was banking on a manufacturing revival to help drive economic growth after the easing of pandemic restrictions and supply chain bottlenecks. A disappointing rebound in China, combined with sticky inflation in the US and Europe, are sapping demand for the region’s goods.

The Caixin survey covers mainly smaller and export-oriented businesses in China compared with the official PMI. Manufacturers reported muted foreign demand as a key factor weighing on total sales, with new export orders down noticeably in July. 

“The market has been lukewarm, with sluggish demand, and supply has shrunk in tandem,” Wang Zhe, a senior economist at Caixin Insight Group, said in a statement. “The readings for total new orders and output were the lowest since December and January, respectively,” 

The data offers fresh evidence that China’s economic momentum weakened further in July. Consumer spending remains subdued, while the property market shows no signs of a turnaround. 

What Bloomberg Economics Says ...
 

“Exports are unlikely to rescue the recovery. The drop in China’s outbound shipments widened to double digits in June, and the outlook for the second half of 2023 is grim. Manufacturing PMIs for the U.S., the euro area and Japan stayed in contractionary territory in July — boding ill for demand.”

— Chang Shu and Eric Zhu

Investors, though, have turned optimistic in recent days over potential policy stimulus after China’s top leaders promised to boost the capital market and signaled more support for the housing sector. However, Beijing has stopped short of providing direct cash support to consumers and providing any major fiscal or monetary stimulus.

“At present, monetary policy only has limited effect on boosting supply,” said Wang. “An expansionary fiscal policy that targets demand should be prioritized.”

In Taiwan, new export business contracted, with firms reporting reduced demand across a range of markets, including Europe, Japan, China and the US. 

South Korea’s PMI improved slightly to 49.4 in July, but was still below the 50 mark that signals a contraction. It was its softest decline in a year, nudging manufacturers to increase staffing and purchasing.

Domestic demand partly helped insulate Southeast Asia, with new business and steady production propelling factory activity to expand to a region’s best 53.3 in Indonesia and 51.9 in the Philippines. The downturn in manufacturing hub Vietnam, meanwhile, eased to 48.7 from 46.2 amid subdued demand in its export markets.

(Updates with comments from economists.)

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