Both manufacturing and services sectors underperform, fueling calls for renewed stimulus from Beijing

Dual Weakness in Industry and Services

Financial markets were greeted this week with another clear signal of deceleration in the world’s second-largest economy. China’s Purchasing Managers’ Index (PMI) readings for July, released overnight, revealed concerning softness across both manufacturing and non-manufacturing sectors. The Manufacturing PMI fell to 49.3, missing the 49.7 consensus and slipping further below the previous month’s 49.7. The Non-Manufacturing PMI — covering services and real estate — also edged down to 50.1, below forecasts of 50.3 and a prior reading of 50.5.

These figures compound a string of recent underwhelming macro indicators — including weak exports, sluggish domestic consumption, and rising youth unemployment — strengthening the case for renewed policy intervention by Beijing.

Manufacturing Struggles to Regain Traction

Since the lifting of the Zero-COVID policy in late 2022, China’s manufacturing base has failed to regain sustainable momentum. Despite optimistic forecasts at the start of the year, the sector continues to contract. Global demand for Chinese goods remains soft due to high interest rates in developed economies and a gradual diversification of supply chains toward India, Vietnam, and Mexico.

The fact that the PMI has remained below the expansionary threshold of 50 reinforces that factory activity remains in decline, with falling new orders, weak hiring trends, and rising inventories.

Services and Real Estate Recovery Stalls

The non-manufacturing sector, which Beijing hoped would drive domestic demand, is showing only marginal growth. While a 50.1 reading technically indicates expansion, it barely clears the neutral line and signals a fragile recovery. Real estate continues to drag the economy, with weak housing starts, falling home prices, and stalled construction projects.

Moreover, Chinese consumers remain cautious — household savings rates are elevated, and spending on discretionary services such as dining, travel, and private education remains muted. This reflects fragile consumer confidence, which fiscal tools alone may not be sufficient to fix.

Policy Options: Stimulus or Structural Reform?

With inflation running soft — even bordering on deflation in some sectors — and the global rate environment limiting monetary levers, China’s central bank (PBoC) has limited but non-negligible room to maneuver. Targeted rate cuts and liquidity injections have already occurred, and more could be on the horizon in the form of credit easing and infrastructure investment.

Yet beyond monetary tools, broader fiscal policy will likely be required. There is growing anticipation of a new stimulus package modeled after prior interventions such as 2015’s infrastructure surge, aimed at stabilizing growth, boosting employment, and reviving business sentiment.

Global Spillovers: From Commodities to Central Banks

China’s economic health has far-reaching implications. Weak Chinese demand impacts export-reliant economies like Germany, Australia, Japan, and Brazil. Commodity markets are especially sensitive — prices for copper, iron ore, and crude oil remain vulnerable to a slowdown in construction and industrial output.

Furthermore, soft Chinese growth may help keep global inflation pressures subdued, which could in turn affect central bank decision-making in the U.S. and Europe in the coming months.

Forward Outlook: Can Beijing Restore Momentum?

As of now, consensus GDP forecasts for China in 2025 stand at roughly 4.5%, well below the government’s traditional 6% target range. If macro indicators continue to underperform, pressure will build for more aggressive fiscal support — from direct consumer incentives to real estate stabilization and expanded public investment.

Still, even if new stimulus arrives, structural challenges remain. Demographic headwinds, a restrictive regulatory environment, and a gradual pivot to a services- and technology-based economy all point to a lower long-term growth trajectory.