Slowdown in domestic economy weighs on Chinese manufacturing in August

Factory sector activity in the People's Republic of China continued to slow last month, amid a "grim" outlook for exporters and falling employment.

Caixin's manufacturing sector Purchasing Managers' Index slipped from a reading of 50.8 for July to 50.6 in August, missing economists' forecasts for a dip to 50.6.

Output growth did pick-up last month, but alongside a deceleration in new order growth to its slowest since May 2017 and a fifth consecutive monthly drop in export sales.

"The sub-index for new export orders inched up despite remaining in contractionary territory, implying a still-grim export situation," said Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group.

In parallel, a sub-index linked to hiring dipped to its lowest since July 2017, the survey compiler said.

"Reports of company restructuring and cost-cutting initiatives underpinned a further reduction in headcounts at Chinese manufacturers in August. The rate of job shedding picked up from July but remained moderate overall," Caixin said in a statement.

On the prices front, input price increases accelerated in August, rising at their second-fastest clip in seven months, driven up by costlier raw materials prices.

Manufacturing firms' optimism regarding the outlook was little changed from the month before, Caixin said.

"Optimism regarding future production remained relatively subdued in August, with confidence little-changed from June's recent low.

"Positive forecasts were generally linked to expectations of rising client demand. However, concerns [among a number of panellists] over the ongoing China-US trade war and softer demand conditions weighed on overall sentiment," Caixin added.

Commenting on Monday's data, Julian Evans-Pritchard at Capital Economics said: "while the new export orders component of the former fell, it rose in the unofficial index, which suggests that the main drag on growth last month was weaker domestic demand.

"Certainly, the pick-up in Korea's export growth last month suggests that China’s exports probably held up reasonably well in August despite additional US tariffs coming into force."

In a separate report, Caroline Bain, also at Capital Economics, added: "China's PMI readings for August confirm our view that the economy is slowing as a result of subdued domestic demand. Although some policy easing is underway, it will be some time before this translates into an upturn in economic activity and higher commodities demand and prices."