China’s factory activity fell into contraction territory in July for the first time since February, as a surge of early export shipments that propped up growth rapidly faded.
The official manufacturing purchasing managers’ index dropped to 49.2 in July from 50.3 in June, according to data released Friday by the National Bureau of Statistics.
The reading fell below the 50-point threshold that separates expansion from contraction, missing economists’ median forecast of 50.0 by a meaningful margin.
The result ended a three-month expansion streak that had been fueled largely by exporters rushing shipments ahead of anticipated U.S. tariff increases.
The July figure represents the weakest manufacturing PMI reading since February and signals growing pressure on Beijing to do more to stimulate domestic demand.
The data landed just one day after China’s top policymakers acknowledged “difficulties and challenges facing the economy” at their mid-year meeting, pledging to accelerate fiscal spending.
Policymakers also vowed to roll out “incremental policies” to shore up growth during the second half of the year, though the meeting stopped short of announcing concrete measures.
China’s economy expanded 4.3% in the second quarter from a year earlier, the slowest pace in more than three years and below the lower end of the government’s full-year target range of 4.5% to 5%.
Exports had been one of the economy’s few reliable growth engines this year, but that engine is now showing visible signs of strain heading into the second half.
“U.S.-bound shipments fell outright for the first time in several months,” according to a survey conducted by China Beige Book, pointing to a sharp reversal in trade momentum.
The research firm found factory activity decelerated broadly in July, with manufacturing posting its worst performance on employment as job growth deteriorated across all surveyed sectors compared to a year earlier.
That marks a stark turnaround from June, when shipments to the United States rose 14%, helping overall exports surge 27%, the fastest pace in nearly five years.
Manufacturers had frontloaded orders ahead of expected higher American tariffs, with businesses bracing for additional levies following President Donald Trump’s Section 301 probes after the 10% broad-based duty expired on July 24.
Retail sales also fell in July from both the prior month and a year earlier, with China Beige Book noting that travel and restaurants saw a particularly sharp year-on-year downturn.
Eurasia Group analysts said Chinese leaders see growth at risk of falling below target in the second half, as new-economy sectors such as AI fail to offset slowdowns in traditional industries.
“Officials continue to prioritize risk containment over near-term growth,” Eurasia Group said, identifying property, local government debt, and smaller financial institutions as structural risks to manage over time.
The disappointing PMI print is widely expected to sharpen market expectations for additional monetary and fiscal easing measures in the months ahead.
