Official China factory PMI misses forecasts in July

A key survey of manufacturing sector conditions in China weakened unexpectedly in July, reaching its lowest level in over a year, but mainly reflecting domestic headwinds, economists said.

The 'official' factory sector purchasing managers' index slipped from a reading of 51.5 in June to 51.2 for July, missing the consensus forecast for a reading of 51.5.

However, Julian Evans-Pritchard at Capital Economics pointed out how the export orders gauge contained in the survey was in fact steady. That, he said, showed that the depreciation in the country's currency, the yuan, had offset the impact from US trade tariffs thus far.

"The export orders component held steady, which suggests that the impact of the first tranche of US tariffs that came into effect this month is being largely offset by a weaker renminbi. Instead, weaker domestic demand appears to be to blame for the lower PMI reading – the import component fell to a 23-month low," Evans-Pritchard said.

According to the economist, prices gauges contained in the PMI report also pointed to an easing in producer price inflation in July.

A private-sector factory PMI compiled by Caixin, which tends to carry more weight with analysts, was set for release on Wednesday morning.

"For now, today’s data suggest that the June decline in the China Activity Proxy – our in-house measure of GDP growth – probably extended into July (see Chart 1 again), consistent with our view that China's economy is on track to slow this quarter and next, triggering additional policy easing."