China’s August official PMI and domestic-demand conditions Report Interpretation

Overview

This macro update assesses China’s August official PMIs. Nomura concludes that the manufacturing rebound does not signal a durable acceleration, while weak services and construction point to deteriorating domestic demand and limited near-term policy support.

Core views

China’s official manufacturing PMI rose to 49.8 in August from 49.0 in July, exceeding market consensus of 49.5 and Nomura’s 49.2 forecast. However, Nomura cautions against interpreting the move as a sudden improvement in growth momentum. It attributes the large recent swings—50.3 in June, a sharp July decline, and the August rebound—mainly to quarter-end and quarter-start seasonal distortions. The June-July average of 49.8 exactly matched the August reading and was also consistent with the average of the first five months, suggesting that the underlying manufacturing trend was broadly steady rather than improving. The report evaluates manufacturing sub-indices against their June-July averages to reduce the effect of seasonal noise. Production moderated to 50.4 in August from 50.7 in June-July, while new orders improved to 50.6 from 49.9. New export orders rose to 50.1 from 49.9, and Nomura expects export growth to remain elevated in August amid the ongoing global AI supercycle. In contrast, raw-material inventories fell to 48.1 from 48.4 and employment declined to 48.7 from 48.8. Supplier delivery efficiency increased to 50.1 from 49.7. By enterprise size, large-company PMI rebounded to 50.6 from a 50.1 June-July average, while medium-sized firms fell sharply to 49.4 from 50.1 and small firms remained weak at 47.9 versus 47.8 in June-July and 48.0 in January-May. Nomura highlights PMI price indices as less distorted by seasonal factors. The input-price index rebounded to 56.6 in August from 53.2 in July, while the output-price index rose back above 50 to 50.4 from 47.8. These readings increase the institution’s conviction in its forecast for positive sequential PPI inflation of 0.3% month on month in August, compared with -0.7% in July. The more concerning signal is non-manufacturing activity. The official non-manufacturing PMI remained at 49.0 in August, unchanged from July and below both consensus and Nomura’s forecast. Services PMI was also unchanged at 49.3, while construction PMI slipped to 46.9 from 47.0—the lowest reading since the onset of the COVID pandemic—and had remained in contraction for eight consecutive months. Construction new orders were still highly depressed at 42.4, only modestly above July’s 40.1. Within services, postal services, telecommunications and satellite transmission, and internet software and IT services were above 55, but wholesale, retail and capital-markets services remained below 50. The services expectation sub-index was 55.5, indicating that firms retained optimism about future industry development despite current weakness. Authorities have recently increased pro-growth efforts through investment-spending meetings, an expanded interest-subsidy programme, further local property easing in some top-tier cities, and moderate credit easing for homebuyers and developers. Nomura nevertheless expects the immediate growth effect to be limited, particularly given worsening fiscal contraction, and maintains its below-consensus 4.3% Q3 GDP-growth forecast. It expects further policy measures later in the year as pressure to support growth rises, but argues that the K-shaped nature of the economy will likely prevent large-scale stimulus. The report also sees the revised property model as reflecting Beijing’s intention to address delayed home delivery, while noting that financially stretched private developers and a large stock of non-performing debt may complicate the transition.

Analysis framework

Nomura compares the August PMI level and sub-indices with consensus, its own forecasts, and June-July averages to distinguish underlying momentum from quarter-end seasonal distortions. It then links manufacturing, service, construction and price-index readings to export conditions, domestic demand, PPI prospects, policy actions and its Q3 GDP forecast.

Methodology notes

• Other

  Seasonality-adjusted comparison using June-July averages

  Because the report considers individual PMI readings around quarter-end and quarter-start heavily distorted, it compares August sub-indices with their June-July averages to judge the underlying trend.

• Industry AnalysisSupply-demand framework

  Comparison of resilient supply with weakening domestic demand

  The report uses manufacturing, services and construction PMIs to assess the divergence between supply conditions and demand weakness in China’s economy.

Key data

• Official manufacturing PMI49.8August, up from 49.0 in July; above consensus of 49.5 and Nomura’s 49.2 forecast.
• June-July manufacturing PMI average49.8Equal to the August reading, supporting Nomura’s view that the rebound was largely seasonal.
• New orders PMI50.6August, up from a 49.9 June-July average.
• New export orders PMI50.1August, up from a 49.9 June-July average.
• Input-price PMI56.6August, up from 53.2 in July.
• Output-price PMI50.4August, up from 47.8 in July and back above 50.
• Official non-manufacturing PMI49.0August, unchanged from July; below consensus and Nomura’s forecast.
• Construction PMI46.9August, down from 47.0 in July; the lowest reading since the onset of the COVID pandemic.
• Construction new orders PMI42.4August, versus 40.1 in July; still highly depressed.
• Q3 GDP growth forecast4.3%Nomura’s below-consensus forecast.
• August PPI forecast0.3% m-o-mNomura expects positive sequential PPI inflation after -0.7% in July.

Impact & implications

Nomura interprets the data as evidence that manufacturing supply and exports remain comparatively resilient, but domestic demand is weakening through soft services and a severe construction slump. Recent policy easing may help at the margin, yet the institution expects limited near-term support and no large-scale stimulus.

Risks

• Financially stretched private developers may struggle to transition smoothly to the revised property model.
• A large overhang of non-performing debt from the property downturn could create further risks.
• Worsening fiscal contraction could weigh on Q3 growth and limit the effect of policy easing.

What to watch

• Whether sustained weakness in non-manufacturing PMI, especially services and construction, continues.
• The scale and timing of additional policy measures expected later in the year.
• The pace of investment spending and the effect of credit and property easing on homebuyers and developers.
• Whether August PPI turns positive month on month as Nomura forecasts.