China's official PMI fell notably in July, with weak domestic demand increasing downside growth risks

Overview

This report analyzes China's official PMI data for July 2026. Official manufacturing PMI fell from 50.3 in June to 49.2, returning to contraction territory; official non-manufacturing PMI declined from 50.2 to 49.0, also below the expansion-contraction threshold. Nomura believes the data reflect weak domestic demand, a continued property-sector downturn, and pressure on services and construction activity, posing downside risks to third-quarter GDP growth.

Core views

The core views are: First, July PMI was significantly below expectations, but the sharp fluctuations in June and July may contain strong seasonal disturbances, so the monthly data should not be overinterpreted. Second, manufacturing showed stronger external demand than domestic demand, with the AI supercycle and global renewable-energy demand supporting exports. Third, the decline in non-manufacturing activity was driven jointly by services and construction, while property-related activity remained weak. Fourth, although policymakers may strengthen countercyclical adjustment and accelerate fiscal spending, Beijing remains concerned about diminishing returns on investment and fiscal-deficit risks, making large-scale stimulus unlikely.

Analysis framework

The report assesses seasonal factors and underlying trends in monthly fluctuations by comparing July's official manufacturing and non-manufacturing PMIs and their subcomponents, while also comparing the June-July average with the January-May average. It links PMI price indices, construction new orders, and divergence across service industries with GDP, PPI, and policy expectations to evaluate the macroeconomic implications.

Methodology notes

• Macroeconomic Cycle AnalysisPMI Expansion-Contraction Threshold Framework

  Using 50 as the dividing line between expansion and contraction to observe changes in manufacturing, services, and construction activity.

  Manufacturing PMI was 49.2 and non-manufacturing PMI was 49.0, both below 50, indicating generally weak economic activity.

• Trend SmoothingCross-Month Average Comparison

  Comparing the June-July average with the January-May average to reduce the impact of quarter-end and quarter-start disturbances on monthly readings.

  The report notes that the monthly average manufacturing PMI for June-July was 49.8, the same as the January-May average, suggesting that the monthly decline should not necessarily be viewed entirely as a sudden deterioration in momentum.

• Macroeconomic Policy AnalysisCountercyclical Policy Constraint Framework

  Assessing the scope for stimulus policy amid growth pressures and fiscal constraints.

  The Politburo meeting emphasized strengthening countercyclical policies and accelerating fiscal spending, but Nomura believes declining investment returns, fiscal-deficit risks, and regional divergence in the benefits of AI-driven growth will constrain the scale of broad-based stimulus.

Asset mapping & comparison

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

• Chinese Macroeconomic Assets

  PMI and GDP expectations directly affect pricing of China's economic growth.

  Strengths

  Export sectors are supported by the AI supercycle and global renewable-energy demand, while the policy tone is more proactive than in the first half of the year.

  Weaknesses

  New domestic orders weakened, services and construction declined simultaneously, and the property downturn continues to suppress confidence.

  Comparison

  External demand is relatively stronger than domestic demand, creating a clear divergence.

  Risks

  If weak PMI readings persist, the third-quarter GDP forecast may be revised down further.

• Chinese Equity Market

  Macroeconomic growth, policy expectations, and industry divergence affect equity risk appetite.

  Strengths

  AI-related cities and export chains may benefit from the technology cycle and external demand.

  Weaknesses

  Consumer sentiment is weighed down by the property slump and limited wealth effects, constraining the broadening of a full-scale bull market.

  Comparison

  A geographic and industrial K-shaped divergence is emerging between regions benefiting from AI and those linked to traditional property and consumption.

  Risks

  Stimulus falling short of expectations or a weaker-than-expected earnings recovery could suppress valuations.

• Industrial Goods and PPI-Related Assets

  PMI price indices provide clues about PPI and demand for industrial goods.

  Strengths

  Input prices remain above 50, indicating some remaining support on the cost side.

  Weaknesses

  The output price index fell further to 47.8, pointing to weak price pass-through.

  Comparison

  Input prices are higher than output prices, indicating that corporate profit margins may be under pressure.

  Risks

  If demand continues to weaken, negative month-on-month PPI growth may persist.

Key data

• July Official Manufacturing PMI49.2June was 50.3; market consensus was 50.1 and Nomura's forecast was 49.9.
• July Official Non-Manufacturing PMI49.0June was 50.2; market consensus was 50.0 and Nomura's forecast was 49.9.
• Nomura's Third-Quarter GDP Forecast4.5%The report believes this forecast faces downside risks; second-quarter GDP growth was 4.3%.
• July Services PMI49.3June was 50.4, weighing on non-manufacturing PMI.
• July Construction PMI47.0June was 49.0, the lowest reading since the pandemic and in contraction territory for seven consecutive months.
• July Construction New Orders Index40.1June was 46.3, indicating severely depressed construction demand.
• July Output Price Index47.8June was 48.2; based on this, the report expects July PPI to decline 0.2% month on month.
• June-July Manufacturing PMI Average49.8The same as the January-May monthly average, indicating that seasonal disturbances may have been significant.

Impact & implications

For investment implications, the report reinforces the view that China's growth momentum is weak and that policy support will provide a floor but is unlikely to be significantly scaled up. Weak domestic demand and the property-sector drag may weigh on cyclical asset performance; external demand, the AI supercycle, and renewable-energy demand continue to support parts of the export chain; continued weakness in PPI suggests that industrial-goods prices and corporate profits remain under pressure.

Risks

• Seasonal disturbances in July PMI may lead to misjudgments about underlying growth momentum.
• If weak domestic demand and the property downturn persist, they may further weigh on GDP and consumer confidence.
• The strength of policy stimulus may be constrained by fiscal-deficit concerns and diminishing investment returns.
• The sharp decline in construction new orders indicates continued downside risks to property- and infrastructure-related demand.
• Negative month-on-month PPI growth may intensify pressure on corporate profits.

What to watch

• Whether subsequent official manufacturing and non-manufacturing PMIs can return above 50.
• Whether July export data confirm support for external demand from the AI supercycle and renewable-energy demand.
• The pace of fiscal-spending acceleration and the implementation strength of countercyclical policies.
• Changes in property-related PMIs, construction new orders, and services consumption subcomponents.
• July PPI month-on-month and year-on-year trends, and whether the output price index continues to contract.