Gold Nears Two-Week Low as China’s Economic Data Point to Persistent Weakness

China’s factory activity improved in August, but the manufacturing sector remained in contraction and services showed no recovery. The uneven figures point to an economy still relying heavily on manufacturing and exports while domestic consumption and investment remain weak.

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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, beating the median forecast of 49.6 in a Reuters poll. New orders and production returned to expansion territory, both recording readings above 50.

The services and construction measure, however, stayed at 49.0, matching July and marking its weakest level since December 2022. Lynn Song, ING’s chief economist for Greater China, said the services data suggested that domestic demand remained sluggish and that any rebound could be limited.

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

Equipment manufacturing and high-tech manufacturing recorded readings above 51, while 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 manufacturing stayed below the expansion threshold. He called for stronger government investment in public goods to lift business orders and confidence.

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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.

Economists cautioned against declaring a recovery. Xu Tianchen of the Economist Intelligence Unit said domestic demand appeared to be returning, but likely because of artificial intelligence and exports rather than broader policy expansion. Other recent data showed slower goods consumption and industrial output, falling fixed-asset investment and continued weakness in the property market. Exports remained a source of growth, supported by demand for AI-related shipments.

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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.