Volkswacht Bodensee - China factory activity slides as leaders seek spending boost

The country's manufacturing sector has faced uncertainty this year due to the Middle East war, which has driven up global energy prices and disrupted shipping.

Booming exports underpinned by strong demand overseas for electronics and AI hardware have provided a lifeline as consumption at home remains weak.

The manufacturing purchasing managers' index (PMI), a closely watched gauge of industrial health, fell into contraction territory at 49.2, data by the National Bureau of Statistics showed Friday.

That was well below the 50.1 expansion forecast by a Bloomberg survey of economists, and also down from June's 50.3.

"Domestic weakness appears largely to blame -- while the export orders index softened a bit, it remains relatively strong compared to the past few years," wrote Julian Evans-Pritchard of Capital Economics.

"The weakness will increase pressure on local governments to follow through on the Politburo's latest request for them to step up their spending," he said, referring to calls this week by a top decision-making body.

China's economy grew 4.3 percent year-on-year in the second quarter of 2026, the slowest pace in more than three years, official data showed this month.

The persistent slump in domestic spending, as well as a years-long crisis in the once-roaring property sector, have left Beijing reliant on exports to achieve growth.

The government's official growth target for this year is 4.5-5.0 percent -- the lowest in decades.

- Xi notes 'challenges' -

In another stark sign of woes, the official non-manufacturing PMI, which measures activity in sectors such as services and construction, fell sharply to 49.0 in July, the data showed Friday.

That contraction was the most pronounced in more than three years.

The reading indicated "a decline in the non-manufacturing sector's prosperity level" in July, said NBS statistician Huo Lihui in a statement.

Huo said the "main factors" for the slump were "significant declines" in activity across wholesale trade and monetary financial services, while the real-estate sector was also "below the critical point".

The lacklustre figures come one day after President Xi Jinping acknowledged "difficulties and challenges" facing the country's economy.

Xi said in a speech addressing leaders that in the second half of the year "we must enhance the effectiveness of macroeconomic policies (while) focusing on tapping the potential of domestic demand", according to state news agency Xinhua.

Messages from China's Politburo this week "suggest that the policy makers focus on the quality of growth rather than the speed", said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management.

"Acceleration of fiscal spending will be the key policy support" in the third quarter, he wrote, adding that "development of the new technology sector is on the top of the policy agenda".

G.Frei--VB