Chinese Factory Slump Eases, but Weak Services Signal Uneven Recovery

China’s factory activity improved in August, but the sector remained in contraction, while weak services activity pointed to an uneven recovery and continued pressure on domestic demand.

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Domestic demand seems to be coming back, although it's more likely to have been driven by AI and exports than by policy expansion.

The official manufacturing purchasing managers’ index rose to 49.8 from 49.2 in July, according to the National Bureau of Statistics. The reading exceeded the 49.6 median forecast in a Reuters poll but remained below 50. New orders and production returned to expansion territory, with both sub-indexes above 50.

The improvement was strongest in equipment manufacturing and high-tech manufacturing, whose readings exceeded 51. Consumer goods and high-energy-consuming industries remained in contraction. Zhang Liqun of the China Federation of Logistics & Purchasing said business confidence remained unstable while the manufacturing PMI stayed below the growth threshold. He called for stronger government investment in public goods to increase business orders and support confidence.

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Because China's services sector is primarily domestically focused, this suggests domestic demand remained relatively sluggish in August.

Services and construction offered less encouragement. The non-manufacturing PMI remained at 49.0, unchanged from July and the weakest level since December 2022. Lynn Song, ING’s chief economist for Greater China, said the reading suggested domestic demand remained sluggish and that any near-term rebound would likely be limited.

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For now, the PMI data suggests that we are due for another month of relatively sluggish domestic activity data in August, with any potential rebound likely to be limited.

Other recent data showed slowing goods consumption and industrial output, declining fixed-asset investment and continued weakness in the property market. Exports remained a growth driver, supported by demand for artificial-intelligence-related shipments that lifted prices for Chinese high-tech goods. Xu Tianchen of the Economist Intelligence Unit said domestic demand might be returning, but likely because of AI and exports rather than broader policy expansion. Pinpoint Asset Management chief economist Zhiwei Zhang said it was too early to conclude that the economy had rebounded.

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Continued government investment in public goods should be strengthened to effectively drive increased orders for businesses, continuously consolidate and enhance business confidence, and further strengthen factors contributing to economic stabilization and recovery.