What's takeaway 1 on China’s PMI fell sharply in July as markets await policy support?

China's manufacturing and non-manufacturing PMIs fell into contraction in July, signaling economic weakness.

What's takeaway 2 on China’s PMI fell sharply in July as markets await policy support?

Expectations for policy support from the Chinese government are rising in light of disappointing economic indicators.

What are the market implications for China’s PMI fell sharply in July as markets await policy support?

Traders should watch the 49.0 level in the PMI data, as a sustained trend below this threshold could prompt more aggressive monetary easing from the PBoC. The upcoming Central Bank communications will be pivotal in shaping market expectations around USD/CNY.

What are the risks to this view on China’s PMI fell sharply in July as markets await policy support?

Should the PMI data improve unexpectedly or if the PBoC signals a more restrained approach to policy easing, this could lead to a rapid reversal in yuan sentiment and strengthen the CNY against the USD.

China’s PMI fell sharply in July as markets await policy support

What the desk is arguing

The desk frames this as a critical juncture for China’s economic outlook, particularly with disappointing PMI data underscoring a potential continuation of the macro slowdown into the second half of the year. The manufacturing PMI's fall to 49.2, down from 50.3 in June, coupled with a non-manufacturing PMI drop to a 43-month low at 49.0, has triggered heightened expectations for significant policy support.

The decline in both indices signals waning demand and production activity, with significant subcomponents like new orders (48.5) and production (49.6) retreating into contraction. Notably, the persistent contraction in ex-factory prices suggests that PPI inflation has likely peaked, further complicating the reflation narrative the government aims to promote.

Where it sits in our coverage

Our internal consensus on USD/CNY presents a target of 1.075, with a range of 1.04 to 1.12. The positions of several firms reflect varying degrees of optimism on the currency, including: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)

With the desk's projection aligning closely with jpmorgan and at the higher end of the range, this positions our view in line with a cautious but upwardly optimistic sentiment around USD/CNY, influenced by anticipated easing measures from Chinese policymakers.

How other firms see it

The majority of aligned firms suggest a bearish outlook on the yuan given the recent economic data, indicating a preference for USD appreciation against CNY in the short term. Conversely, some firms, led by bofa, are more pessimistic, projecting a lower target for USD/CNY based on anticipated economic recovery signals.

Traders should also keep an eye on the upcoming shifts in central bank policies, particularly from the People's Bank of China, which could have significant implications for USD/CNY and overall market sentiment as investors gauge the balance between support and economic health.

Older quick take Quick take Published 03:23 China China’s PMI fell sharply in July as markets await policy support China’s purchasing managers index came in much softer than expected, with both manufacturing and non-manufacturing PMI slumping into contraction territory. This signals that the recent macro slowdown may continue into the second half. The incremental policy easing signalled at yesterday's Politburo meeting seems increasingly necessary Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Lynn Song Chief Economist, Greater China 49.2 China's July manufacturing PMI Lower than expected Manufacturing PMI data suggests we might have already seen the peak for PPI inflation China’s manufacturing purchasing managers’ index fell to 49.2 in July, down from 50.3 in June and well below expectations (market: 50.1, ING: 50.1).

This level marked a 5-month low and is well into contraction territory. Although the PMI's correlation with industrial output has weakened in recent years, the latest reading remains an unpromising start to the first wave of economic data for the second half of the year. Most key subindices fell below the 50 threshold in July, with production (49.6), new orders (48.5), new export orders (49.6) and purchase volumes (49.4) all slipping from expansion in June back into contraction in July.

Ex-factory prices remained in contraction for a second month, suggesting an increased likelihood that we have already seen the peak of PPI inflation this year. China's reflation trend could face increasing challenges in the second half of the year if this continues. The only two subindices still in expansion were the raw materials purchase price (53.2), which nonetheless was still lower than what we saw in June, and activity expectations (54.1).

Price subindices continue to drop in sign that PPI may have peaked Non-manufacturing PMI dropped to 43-month low Non-manufacturing PMI fell to 49.0, down from 50.2, coming in well below forecasts (market: 50.0, ING: 50.0). This level was the lowest since the pandemic-stricken 2022, and is a negative sign amid the recent push to unleash the potential of services consumption. The subindices suggest weakness across the board.

New orders (44.4), new export orders (47.0), and sales prices (47.9) all fell to multi-month lows. The only two subindices in expansion territory were business expectations (55.4) and suppliers' delivery time (50.9). Overall, the PMI data suggests a weak start to the second half of the year.

Yesterday's Politburo meeting offered a more supportive tone and suggested more incremental easing measures are on the way. We believe the main area of support could be fiscal policy, where there was a commitment to accelerate fiscal expenditures. The overall investment appetite has been weak amid soft confidence, geopolitical uncertainty, and a tighter regulatory environment.

Project approvals have slowed after calls to reduce redundant investment, but restarting this pipeline could support the rapid decline in investment growth we have seen in the past few months. Non-manufacturing PMI hits post-pandemic low PMI China Asia Pacific Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.

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