July NBS PMI Broadly Weakens, Raising Fiscal Execution Pressure

Overview

This report focuses on China's July NBS PMI data. Both manufacturing and non-manufacturing PMI weakened markedly, with production-, demand-, price-, and employment-related subindices all softening simultaneously, pointing to a weak start to Q3. The report believes this will increase pressure to execute fiscal policy, particularly by accelerating fiscal spending and bond-fund deployment to support investment and consumption.

Core views

The core conclusions are: first, July manufacturing PMI unexpectedly fell into contraction territory, with the output subindex dropping below 50 and industrial production momentum facing downside risks; second, weak demand mainly came from domestic orders, while export orders also remained in contraction, potentially affected by typhoon disruptions; third, non-manufacturing activity also declined, with both services and construction weak; fourth, pricing power remains limited and deflationary pressure may re-emerge; fifth, policymakers are more likely to accelerate fiscal implementation first, while additional easing will still depend on the extent of the Q3 slowdown.

Analysis framework

The report uses a PMI subindex decomposition framework, cross-validating manufacturing, non-manufacturing, output, new orders, export orders, prices, employment, and construction indicators against hard data and policy signals. It also incorporates port tracking, Politburo meeting language, the global industrial cycle, and energy shocks to assess the subsequent growth and policy paths.

Methodology notes

• Macroeconomic Cycle AnalysisNBS PMI Diffusion Index

  The 50 threshold and subindex momentum

  A PMI above 50 generally indicates expansion, while one below 50 indicates contraction. The report focuses on whether the output, new orders, export orders, price, and employment subindices weaken simultaneously.

• Policy Reaction FunctionFiscal Execution Pressure Assessment

  Slowing growth and fiscal acceleration

  When the PMI indicates simultaneous weakness in demand and production, the report believes fiscal spending and bond-fund deployment need to accelerate to offset downside pressure on investment and consumption.

• Data ValidationCross-Validation of PMI and Hard Data

  Leading indicators do not necessarily equal actual output

  The report notes that PMI does not always align perfectly with hard data such as industrial production, so the RatingDog PMI, trade data, and subsequent activity data are needed for confirmation.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China's Macroeconomic Growth

  Directly Related

  Strengths

  Policymakers may still support growth by accelerating fiscal spending and bond-fund deployment.

  Weaknesses

  Manufacturing and non-manufacturing both fell into contraction territory, indicating a weak start to Q3.

  Comparison

  The July data were weaker than JPMorgan's and the market's previous expectations.

  Risks

  If fiscal execution falls short of expectations, the Q3 growth slowdown could deepen.

• Industrial Production and Manufacturing Chains

  Highly Related

  Strengths

  The future output PMI remains at 54.1, with business expectations staying expansionary.

  Weaknesses

  The output PMI fell below 50, while new orders declined to 48.5, indicating weakness in both production and demand.

  Comparison

  June industrial production rose 1.0% month-on-month on a seasonally adjusted basis, but the July PMI suggests the rebound will be difficult to sustain.

  Risks

  The traditional production off-season and insufficient orders may weigh on manufacturing activity.

• Export-Related Assets

  Moderately to Highly Related

  Strengths

  The report still believes exports can be supported by the global industrial and AI upcycles.

  Weaknesses

  The new export orders PMI fell to 49.6, entering contraction territory.

  Comparison

  The decline in export orders was smaller than the overall decline in new orders, indicating that domestic demand was the larger drag.

  Risks

  Tariff risks are rising, while port disruptions may affect the interpretation of short-term data.

• Fixed-Asset Investment and Construction Chains

  Highly Related

  Strengths

  Faster deployment of fiscal bond funds could provide marginal support.

  Weaknesses

  Construction PMI fell to 47, with the property downturn remaining the main drag.

  Comparison

  Overall non-manufacturing PMI fell to its lowest level since the end of 2022, while construction performed even more weakly.

  Risks

  Local government leadership changes, weak property activity, and weather disruptions may increase uncertainty around investment recovery.

• Prices and Deflation Expectations

  Directly Related

  Strengths

  Input prices remain in expansion territory, indicating that the cost side has not collapsed across the board.

  Weaknesses

  Output price PMI remains below 50, with limited downstream pass-through and pricing power.

  Comparison

  Input price growth slowed while output prices continued to decline, leaving margin pressure in place.

  Risks

  If domestic demand remains weak, concerns over PPI and broad-based deflation may resurface.

Key data

• July NBS Manufacturing PMI49.2Down 1.1 points month-on-month, below JPMorgan's forecast of 50.8 and the consensus expectation of 50.1.
• Manufacturing Output PMI49.9Down 1.5 points month-on-month, falling below 50 for the first time in five months.
• Future Output PMI54.1Still in expansion territory, indicating that business expectations have not weakened significantly.
• New Orders PMI48.5Down 2.7 points month-on-month, indicating a more pronounced weakening in domestic demand.
• New Export Orders PMI49.6Down 0.5 points month-on-month, potentially affected by Typhoon Bavi's disruption to port operations.
• Input Prices PMI53.2Down 1.0 point month-on-month, indicating slower cost increases.
• Output Prices PMI47.8Down 0.4 points month-on-month, indicating weak downstream pricing power.
• Non-Manufacturing PMI49.0Down 1.2 points month-on-month, the lowest since the end of 2022.
• Services PMI49.3Down 1.1 points month-on-month, mainly dragged down by wholesale trade and financial services.
• Construction PMI47.0Contraction became more pronounced due to the property downturn, summer rainfall, and high temperatures.
• June Industrial Production1.0% m/m saThe report believes that the July PMI weakness may make this rebound momentum difficult to sustain.

Impact & implications

For asset and macroeconomic assessments, broad PMI weakness reinforces the combination of near-term downside growth risks, faster fiscal implementation, and renewed deflationary pressure. If subsequent RatingDog PMI, trade data, and hard activity data confirm a slowdown, markets may place greater bets on policy support. However, if exports continue to outperform, supported by the global industrial and AI cycles, external demand could partially offset weak domestic demand.

Risks

• PMI weakness may understate or overstate changes in actual hard data, requiring confirmation from subsequent industrial production and trade data.
• Continued weakness in domestic demand may weigh on manufacturing orders, employment, and prices.
• The property downturn, rainfall, and high temperatures may further suppress construction and fixed-asset investment.
• If fiscal spending and bond-fund deployment fall short of expectations, policy support may prove insufficient.
• Developments in the Middle East, energy prices, and tariff risks may disrupt external demand and costs.

What to watch

• Next week's RatingDog PMI, particularly the performance of export-oriented companies.
• China's trade report to verify export resilience and the recovery after port disruptions.
• The pace of fiscal spending and bond-fund deployment.
• July hard activity data, including industrial production, fixed-asset investment, and consumption.
• Input prices, output prices, and PPI trends to assess whether deflationary pressure is intensifying again.