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China's factory activity contracted in July, a private survey shows

Key Points
  • The Caixin/Markit factory Purchasing Managers' Index for July was 49.9.
  • PMI readings above 50 indicate expansion, while those below that level signal contraction.
  • For China, the PMI is among the economic indicators that global investors watch closely for signs of trouble amid domestic headwinds and the ongoing U.S.-China trade dispute.
Workers sewing in a clothing factory in Bozhou, east China's Anhui province.
STR | AFP | Getty Images

China's manufacturing activity contracted in July, according to results of a private survey released on Thursday.

The Caixin/Markit factory Purchasing Managers' Index (PMI) was 49.9 in July — slightly better than expected, but still in contractionary territory.

Analysts polled by Reuters had expected the indicator to come in at 49.6. The reading for June was 49.4.

PMI readings above 50 indicate expansion, while those below that signal contraction.

Subindices for new orders and production both returned to expansionary territory, while the gauge for new export orders rose slightly even though it was still in contractionary territory, wrote Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, a subsidiary of Caixin.

In particular, the measure for future output rose in July, signalling that confidence rose among businesses, he added.

"China's manufacturing economy showed signs of recovery in July," said Zhong. "Business confidence rebounded, reflecting the strong resilience in the economy. Policies such as tax and fee reductions designed to underpin the economy had an effect," he said.

On Wednesday, data from the Chinese statistics bureau showed official manufacturing PMI contracted for three straight months, coming in at 49.6 for the month of July.

Even though both the official and unofficial PMI surveys point to modest improvement for the Chinese manufacturing sector with downward pressure easing, headwinds still remain, said Julian Evans-Pritchard, senior China economist at Capital Economics.

The readings "still appear consistent with a renewed slowdown in year-on-year growth in industrial output and broader economic activity," Evans-Pritchard said in a note on Thursday. "This should keep policymakers in easing mode."

While the People's Bank of China has opted not to cut benchmark interest rates like the U.S. Federal Reserve, the Chinese central bank has continued to roll out piecemeal monetary loosening measures — including an expansion of its re-lending facility that provides cheap funding to regional banks, noted Evans-Pritchard.

The official PMI survey typically polls a large proportion of big businesses and state-owned enterprises. The Caixin indicator, features a bigger mix of small- and medium-sized firms.

The PMI is a survey of businesses about the operating environment. Such data offer a first glimpse into what's happening in an economy, as they are usually among the first major economic indicators released each month.

For China, the PMI is among economic indicators that investors globally watch closely for signs of trouble amid domestic headwinds and the ongoing U.S.-China trade dispute.