Rebound in Production and Demand Indices, Slight Rise in August Manufacturing PMI

In August, the manufacturing PMI rose by 0.1 percentage points to 49.4% compared to the previous month, reflecting an improvement in the activity level.

Zhang Liqun, a special analyst at the China Logistics Information Center, noted that the slight rebound in the August manufacturing PMI indicates that the combined effects of policies to boost domestic demand and counter "involution" are beginning to show. However, he also cautioned that the manufacturing PMI remains below the boom-bust line for the fifth consecutive month, suggesting that downward economic pressures are still evident.

Among the sub-indices, the production index (50.8%, up 0.3 percentage points from the previous month) and the supplier delivery time index (50.5%, up 0.2 percentage points) were in expansion territory. Meanwhile, the new orders index (49.5%, up 0.1 percentage points), raw materials inventory index (48.0%, up 0.3 percentage points), and employment index (47.9%, down 0.1 percentage points) remained in contraction territory.

Both production and demand indices rebounded in August. The production index has been above the critical point for four consecutive months, indicating accelerated expansion in manufacturing production. Wen Bin, chief economist at China Minsheng Bank, suggested that the acceleration in production expansion may be related to the moderation and increased precision and sustainability of policies countering "involution." However, he noted that production continues to outpace demand, which will maintain pressure on prices.

In addition to the rise in the new orders index, the new export orders index also saw a slight increase (up 0.1 percentage points to 47.2% from the previous month). Despite these slight improvements, order-related indices remain in contraction territory, highlighting the persistent issue of demand contraction.

Wen Bin pointed out that the new orders index in August was slightly weaker than seasonal performance, likely due to weaker infrastructure and real estate activity since August, as well as the phase-out of policies promoting consumer goods trade-ins. The new export orders index performed slightly better than seasonal trends, which may be attributed to a moderation in global trade tensions and a rebound in manufacturing PMIs across most developed economies, indicating resilience in the global economy. South Korea’s exports in the first 20 days of August grew by 7.6% year-on-year, a significant rebound from the -2.3% decline in the previous month, suggesting continued resilience in external demand.

The two price indices within the manufacturing PMI continued to rise in August. The main raw material purchase price index and the ex-factory price index were 53.3% and 49.1%, respectively, up 1.8 and 0.8 percentage points from the previous month, marking the third consecutive month of increase. Wang Qing, chief macro analyst at Oriental Gold Rating, attributed this primarily to recent market expectations driven by policies countering "involution," which have pushed up prices of domestically dominated bulk commodities such as coal and steel. He predicted that the PPI would turn positive month-on-month in August, with the year-on-year decline narrowing to around -2.8%. However, he noted that the current sluggish industrial prices are mainly due weak consumer demand and declining real estate investment, and the impact of policies countering "involution" on industrial prices and overall price levels requires further observation.

Significant Rebound in Service Sector Activity, Accelerated Expansion in Non-Manufacturing Business Activity Index in August

After a decline in July, the non-manufacturing business activity index rose by 0.2 percentage points to 50.3% in August, indicating continued expansion in the non-manufacturing sector.

Within this, the service sector's activity level rebounded significantly, with the service sector business activity index rising by 0.5 percentage points to 50.5%, reaching a yearly high.

Zhao Qinghe, senior statistician at the National Bureau of Statistics Service Industry Survey Center, noted that by industry, the business activity indices for capital market services, railway transportation, air transportation, and telecommunications, radio and television, and satellite transmission services all remained in high景气区间 above 60.0%, indicating rapid growth in business volume. The business activity index for capital market services has remained above 70.0% for two consecutive months. Meanwhile, the business activity indices for retail and real estate remained below the critical point, indicating weaker activity.

Wang Qing suggested that summer consumption has driven an increase in resident travel and recreational activities, with tourism-related industries showing particularly strong market activity. The significant rally in domestic stock markets in August has kept the business activity index for capital market services above 70.0% for two consecutive months.

Due to recent adverse factors such as high temperatures and rainy weather, construction activity has slowed. The construction business activity index was 49.1%, down 1.5 percentage points from the previous month.

Wen Bin noted that in terms of infrastructure, the average asphalt plant operating rate in August was 31.2%, slightly down from 31.8% in July and below the historical average for the same period. Aside from weather impacts, this is likely related to a slowdown in infrastructure-related fiscal expenditure growth. In real estate, since the second quarter, the slowdown in property sales growth and sluggish corporate repayment rates have gradually transmitted pressure to the front end.

What Is the Outlook for PMI in the Next Phase?

Overall, while the manufacturing PMI rebounded in August, it remains below the boom-bust line for the fifth consecutive month.

Zhang Liqun emphasized that market-driven demand contraction continues to develop, and insufficient demand仍然 poses significant pressure on corporate production and operations. He called for a substantial increase in counter-cyclical macroeconomic policy adjustments, a significant expansion of government investment in public products and services, and efforts to drive a notable increase in market orders, boost corporate production and investment, improve employment and household income, and sustain consumption recovery. The goal is to quickly strengthen the momentum of economic recovery.

Wang Qing pointed out that recent trade agreements between the U.S. and economies such as Vietnam, the EU, and Japan have led to varying degrees of tariff increases. As the effects of "rush exports" and "export diversion" fade, China’s export growth may decline rapidly. Additionally, ongoing adjustments in the domestic real estate market will continue to impact macroeconomic sentiment.综合考虑, he predicts that the manufacturing PMI for September may experience a slight decline again, though seasonal factors could provide some缓冲 (over the past decade, the September manufacturing PMI has on average risen by 0.2 percentage points month-on-month). He preliminarily estimates that the September manufacturing PMI will be around 49.3%, suggesting a certain degree of decline in macroeconomic sentiment in the third quarter compared to the second quarter.

Regarding the non-manufacturing sector, He Hui, vice president of the China Federation of Logistics and Purchasing, stated that overall, the steady growth momentum of the non-manufacturing sector remains unchanged. Driven by policy measures and market self-recovery, the potential of domestic demand will continue to be unleashed. He emphasized the need to continue stabilizing existing demand while cultivating effective incremental demand to enhance the internal drivers of economic growth.

Source: The Paper