China: Policy support balances weak PMIs – UOB

UOB economist Ho Woei Chen highlights that China’s July CFLP PMIs slipped into contraction, with both manufacturing and non-manufacturing gauges signaling broad-based weakness in activity. The report notes particularly soft industrial output and services, while construction also declined. UOB expects growth to stay the main policy priority, with further easing skewed toward fiscal tools and limited room for additional monetary loosening, including steady PBOC policy rates through 2026.

PMIs weaken as policy stays supportive

"China’s CFLP composite PMI slumped 1.3 pts to 49.3 in Jul to its lowest since Dec 2022. The manufacturing and non-manufacturing PMIs concurrently fell into contraction (reading<50), signaling a broad-based weakening in economic activity. The softening in industrial activity is particularly concerning, as policymakers have been relying on external demand and export growth to offset the prolonged weakness in domestic demand."

"The CFLP manufacturing PMI recorded its first contraction in five months, declining 1.1 pts to 49.2 in Jul (Bloomberg est: 50.1, Jun: 50.3). All the key constituents were in contraction with a large drop in production (49.9 from 51.4 in Jun), new orders (48.5 from 51.2 in Jun) and new export orders (49.6 from 50.1 in Jun). However, employment (49.0 from 48.5 in Jun) picked up to its highest reading in 40 months."

"The Politburo meeting on 30 Jul pledged to promptly plan and introduce practical and effective incremental policies, increase counter-cyclical adjustments, intensify efforts to expand domestic demand and optimize supply, and continue to comprehensively address "involutionary" competition. The pace of fiscal spending and bond fund utilization will be accelerated to promote the construction of key projects and new infrastructure, as well as new social development initiatives. Monetary policy tools will be comprehensively utilized and adjusted in a timely manner."

"Growth is expected to remain the primary policy focus in the near term, after 2Q26 GDP growth undershot the official target range of 4.5%-5.0%. Consistent with signals from the Politburo meeting, any additional policy easing is likely to be measured and increasingly driven by fiscal rather than monetary stimulus. We continue to expect the PBOC to keep its benchmark seven-day reverse repo rate unchanged at 1.40% through 2026."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)