China Manufacturing Sector Contracts But Improves Slightly

China's manufacturing sector improved slightly on the month with its PMI reading moving up to 49.3 from 49.0 in June. The reading is still below 50 so it continues to indicate contraction, but there is less contraction than there was a month ago. China has four straight months of manufacturing readings below the level of 50.

The manufacturing PMI reports 11 components, four of which decline month-to-month in July; they are output, employment, new export orders, and imports. Among the 11 component readings, eight of them have individual sector diffusion readings below 50, indicating contraction for that metric.

In June, 8 of 11 components weakened month-to-month with only two component readings having PMI standings above their 50th percentile; the two that scored the highest were delivery speeds and the output, although they were both very mildly above 50 at readings of 50.3 for output and 50.4 for delivery times.

May saw weakening across 10 of 11 components with only delivery times strengthening month-to-month; only delivery times have a reading above its 50th percentile.

Manufacturing readings in China continue to display levels of activity that hover about the unchanged level. March saw a bit of a rebound in the index, but it subsequently lost that bloom and has been below 50 for most of the recent months. In fact, in the 16 most recent months, the Chinese manufacturing PMI is below the diffusion reading of 50 in eleven of those months. During that stretch, two of its ‘above 50’ readings are at 50.1 and another is at 50.2. Clearly the last year and a half has been a weak year for Chinese manufacturing.

Average data show 3-month readings below the breakeven 50-diffusion mark in 9 of 11 areas. Over 6 months, 7 readings are below the diffusion value of 50, while over 12 months, all the sector readings except the one for output average below 50. These statistics confirm a great deal of subpar performance in Chinese manufacturing recently.

The queue percentile standings for the Chinese data from July 2023 back to 2005 show the PMI headline and all the sectors with standings below their 50th percentile except for only two sectors: delivery times and stocks of major inputs. For the rest, the fact that readings are below the 50th percentile mark means that they are below their medians for the period. Delivery times have a 67.7 percentile standing which put them barely into the top one-third of its historic readings, while stocks of major inputs have a 58.5 percentile standing, above its historic median.

The manufacturing PMI itself stands in its lower 10-percentile, which is extremely weak; new orders run low, in their 12th-percentile, output is in its lower 10-percentile, and new export orders in their lower 7th percentile. Imports are in their lower 12th percentile and so on. The percentile standings are extremely low and reinforced the signal that not only are diffusion values showing significant weakness across components as well as contraction, but the level of activity indicated by these sector readings compared to what they show historically are extremely weak readings.

China has a long way to go to repair these problems and, of course, it's going to be difficult because the global manufacturing sector is having challenging times. It's not a sector that's going to create any kind of substantial demand that China is going to be able to fulfill. On top of that, the United States is trying to cut off China's access to high technology products and to the chip sphere. In addition, a number of multinational firms have made substantial moves out of China to try to do business in environments that are more friendly and more stable, particularly after the bad experience that they had with Covid in their Chinese operations.

The Chinese nonmanufacturing sector has generally done better than manufacturing, helping to support the overall economy but it too has run through cycles and is currently involved in downshifting even though the sector has a diffusion value above 50.

China faces a host of domestic issues including social problems stemming from its past one child policy and a clamp down on building which it is now trying to unwind as it tries to support the construction sector again. However, these are difficult things to recover from and China’s population bomb stemming from its one-child policy is something that is simply a fact of Chinese demography. The U.S. and China continue to have their geopolitical tiffs. That's just another feature that keeps the U.S. and Chinese relationships off balance. Globally economies are struggling, inflation is still too high and foreign central banks are engaged in fighting it, a problem China does not face. There are several staging areas for Geopolitical tensions or worse globally. On top of that, the global climate shifts are making life difficult for everyone.