China Factory Activity Slips Despite Trade US Truce — Is The Dragon Losing Its Fire?

China’s factory activity in July slowed to the lowest since April despite the easing of U.S. tariffs amid signs of weakness in exports and tepid domestic consumption.

According to data from China’s National Bureau of Statistics, the purchasing manufacturing index (PMI) slipped to 49.3 in July, compared with 49.7 in June. This compares with the economists’ estimate of 49.7, according to a Reuters News report. A figure below 50 signifies contraction in activity.

Official data showed the PMI of large enterprises slipped 0.9 points to 50.3, while small enterprises' activity also slipped. The new order index slowed to 49.4, down 0.8 points from June, suggesting a decline in manufacturing demand.

Retail sentiment on Stocktwits for the iShares China Large-Cap ETF (FXI) remained in the ‘bullish’ territory at the time of writing.

The weak economic data followed Beijing's revelation that Chinese ports had processed the lowest amount of goods in three months, as of last week, indicating that the export-driven boom related to the frontloading of shipments may be coming to a halt.

NBS statistician Zhao Qinghe attributed the decline in PMI to heavy rains, high temperatures, flooding in some regions, and seasonally weak demand. By industry, business activity in the construction industry slipped 2.2 points to 50.6, while business activity for the services sector also slipped by 0.1 point.

Aided by a trade truce between China and the U.S., Asia’s largest economy had grown by 5.2% in the second quarter, which topped expectations and led to the revision of forecasts for the country’s gross domestic product (GDP) growth. U.S. and Chinese officials are looking to extend the tariff pause even further, boosting the competitiveness of Chinese exports.

However, Chinese policymakers may still need to step in to bolster the economy to boost domestic consumption. According to a survey by the Chinese central bank, consumer sentiment in the country deteriorated in the previous quarter. 

The Chinese government announced a nationwide scheme to distribute childcare subsidies earlier this week, following a series of incentives aimed at boosting consumption.

The iShares China Large-Cap ETF has risen 25.7% this year, compared with 7.7% gains the SPDR S&P 500 Trust (SPY).

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