China’s official PMI report reveals that economic activities continued to expand in July. However, the pace of recovery varied across sectors. Manufacturing and construction activities improved faster than expected, thanks to better overseas demand government’s stimulus measures. However, the services sector was dragged as household demand remained weak. Although PBOC has left the policy rate unchanged since May, the current monetary easing cycle is far from completed. Going forward, the central bank will adopt a targeted easing stance, focusing on  small companies.

The manufacturing PMI climbed +0.2 point higher to 51.1in July, This came in better than consensus of 50.8. The related sub-indices also pointed to stronger momentum in the sector. For instance, the production sub-index added +0.1 point to 54, while the new orders sub-index increased +0.3 point to 51.7. The new export orders sub- index jumped to 48.4 from 42.6 in June, signaling acceleration in overseas demand. Concerning the price levels, the input cost sub-index increased to 58.1 in July from 56.8, while the output prices sub-index dropped -2 points to 52.2. These suggest potential squeeze in profit margins for companies. Separately, the official report also released PMIs for large and medium-sized, and small-sized manufacturing companies. The reading for the former climbed +0.8 point to 52, and that for the latter deepened into contraction, slipping -0.3 point to 48.6 for the month.

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The non-manufacturing PMI slipped -0.2 point to 54.2 in July. The fall was driven by the services PMI which eased to 53.1 from June’s 53.4. The construction PMI, another component in the non-manufacturing PMI gained +0.7 point to 60.5. Despite staying at a strong level, the drop in the services PMI signaled that household consumption has remained weak. This phenomenon has been reflected in the moderation in retail sales in June. Stronger construction activity was clearly facilitated by higher government spending and other policy support.

The report confirmed that China’s economy is on the way to recovery. However, the pace of recovery in manufacturing and construction sectors is faster than that in services activities. Moreover, large and medium sized firms also saw better improvement than small ones. Against this backdrop, the government should maintain it expansionary monetary policy and fiscal stimulus. However, the measures will be more targeted to small companies.

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