China Factory Outlook Worsens in August as Trade War Escalates

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The outlook for China’s manufacturing sector deteriorated further in August, underlining the weakness in the domestic economy ahead of a new round of tariffs kicking in on Sunday.

• The manufacturing purchasing managers’ index dropped to 49.5, according to data released by the National Bureau of Statistics on Saturday. That’s worse than the 49.6 forecast in a Bloomberg survey of economists. The non-manufacturing gauge was 53.8, above the 50 level that divides expansion from contraction.

Key Insights

• “The decline in manufacturing PMI was primarily driven by weakening domestic demand indicators,” wrote economists at China International Capital Corp. led by Yuan Yue. “In a macro environment with a weaker credit cycle and falling nominal growth, there is room and urgency for monetary policy to loosen, in order to prevent real interest rates from rising further.”
• A sub-index gauging new export orders rose to 47.2, but was still in contraction, while new orders contracted further.
• The index showing prices at the factory door continue to decline, although the renewed contraction of input prices should relieve some of the pressure on company profits.
• The weak result indicates that China may need to come up with more support measures amid protracted trade tensions. Policy makers have stepped up targeted measures to shore up the economy, including efforts to drive down the cost of borrowing money and another recent package to encourage consumption.
• The economy slowed in July and a set of early data collated by Bloomberg showed the trend continuing in August, with poor sales managers’ sentiment and falling trade. However, an improvement in small business confidence is a sign that earlier pro-growth measures may be taking effect.

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• Smaller companies continued to contract, while larger companies slowed down.

--With assistance from Yinan Zhao.

To contact Bloomberg News staff for this story: Miao Han in Beijing at mhan22@bloomberg.net;Tomoko Sato in Tokyo at tsato3@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger, Shamim Adam

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With assistance from Bloomberg