Demand Falls Again—Commentary on July Manufacturing PMI Data

The July Manufacturing PMI fell to 49.2% from 50.3% in June (Bloomberg consensus expectation: 50.1%), below the seasonal average of 50% for previous years (2016–2025, excluding 2020); the Non-Manufacturing Business Activity Index dropped to 49% from 50.2% in June (Bloomberg consensus expectation: 50%).

A high base combined with a “pullback” in demand dragged the July Manufacturing PMI below the 50% threshold. Both supply and demand sub-indices retreated, but demand indicators fell more sharply under the energy shock, widening the supply-demand gap once again. Structurally, the divergence between the expansion of “new growth drivers” and the weakness of “old growth drivers” persisted. Specifically:

1. The July Manufacturing PMI fell below 50%, also lower than the seasonal average of 50% since 2016 (excluding 2020). This was mainly driven by weakening demand amid the renewed escalation of US-Iran tensions, while extreme weather such as typhoons and floods also disrupted production activities.

2. Sub-indices for both supply and demand retreated, with a more pronounced decline on the demand side: the New Orders and New Export Orders PMI sub-indices fell by 2.7 and 0.5 percentage points respectively from June to 48.5% and 49.6%. The Production sub-index also dropped by 1.5 percentage points from June to 49.9%. Consequently, the supply-demand gap, measured by the difference between the New Orders and Production sub-indices, widened from 0.2 percentage points in June to 1.4 percentage points.

3. Raw material price indicators continued to fall, marginally easing the profit pressure on mid- and downstream enterprises. In July, the Input Prices and Output Prices sub-indices fell by 1 and 0.4 percentage points respectively from June’s 54.2% and 48.2% to 53.2% and 47.8%. The spread between the two narrowed from 6 percentage points in June to 5.4 percentage points.

4. A retreat in construction business activity dragged down the Non-Manufacturing PMI. The Services and Construction Business Activity Indices fell by 1.1 and 2 percentage points respectively from June to 49.3% and 47%. As a result, the Non-Manufacturing Business Activity Index declined by 1.2 percentage points from June to 49%.

Looking ahead, in an environment of renewed escalation in US-Iran tensions and increased uncertainty in energy supply, the swift deployment of existing fiscal funds is the key variable to support a faster recovery in domestic demand. Key areas to watch include the duration of any potential blockade of the Strait of Hormuz and its impact on the global manufacturing cycle and Chinese exports, as well as whether domestic fiscal policy will ease marginally in the second half of the year. On one hand, recent intensification of US-Iran conflicts and the potential for a secondary blockade of the Strait of Hormuz have led to oil prices surging again after a temporary easing and “delayed” release of supply shocks. Coupled with Trump’s frequent “use” of tariff policies, these factors may disrupt external demand and Chinese exports. Meanwhile, deteriorating terms of trade and a decline in processing export volumes may negatively affect the revenue and profit margins of Chinese companies (see “The Damage of a Second Hormuz Blockade May Be Greater”, 2026/7/24; “Section 301 Tariffs Replace Section 122: What Is the Impact?”, 2026/7/26). On the other hand, the July Politburo meeting stated the need to “increase counter-cyclical adjustment efforts” and emphasized “fully leveraging the effectiveness of various existing policies,” indicating that short-term counter-cyclical policies will focus on accelerating the implementation of existing measures, with fiscal expenditure expected to accelerate further. Therefore, we believe the degree of broad fiscal tightening may ease marginally in the second half of the year. Fiscal policy will likely focus on the “Six Networks,” helping to expand broader “quasi-fiscal” stimulus by accelerating the issuance of remaining government bond quotas for the year, disbursing funds, and swiftly implementing the RMB 800 billion policy-based financial tools, thereby promoting the rapid formation of physical work volume (“July 2026 Politburo Meeting: Policy Maintains Steadiness”, 2026/7/30).

A detailed analysis of the PMI sub-indices follows:

1. Both Supply and Demand in Manufacturing PMI Retreated, Widening the Supply-Demand Gap Again

In July, the demand sub-indices of the Manufacturing PMI showed a more significant retreat than the production side. The supply-demand gap, measured by the difference between New Orders and Production, widened from 0.2 percentage points in June to 1.4 percentage points. Under a high base, the New Orders and New Export Orders indices fell below 50%, partly suppressed by the shock of high oil prices amid the renewed escalation of US-Iran tensions. Extreme weather such as high temperatures, heavy rain, and typhoons also disrupted production, while the AI and high-end manufacturing sectors continued to provide marginal support to manufacturing sentiment. Specifically:

• Domestic demand orders weakened, with the New Orders Index falling to 48.5% from 51.2% in June. The divergence in sentiment between industries related to “new” and “old” growth drivers continues. The PMIs for High-Tech and Equipment Manufacturing fell by 0.2 and 1.1 percentage points respectively from June to 53.3% and 51.4%, but remain significantly higher than the overall manufacturing PMI. Meanwhile, the PMIs for Consumer Goods and High Energy-Consuming Industries fell by 2.4 and 0.1 percentage points respectively from June to 47.8% and 47%, remaining below the 50% threshold.

• The escalation of conflict in the Middle East disrupted external demand, causing a decline in the manufacturing export sub-index. In July, the New Export Orders Index fell to 49.6% from 50.1% in June, but remains above the seasonal average of 48.2% (2016–2025, excluding 2020). Additionally, the Raw Materials Inventory Index fell slightly to 48.3% in July from 48.4% in June, while the Finished Goods Inventory Index rose from 47.7% to 48.6%. This may reflect a slowdown in the destocking of finished goods against a backdrop of weak demand, with companies’ willingness to actively restock remaining weak.

The July Manufacturing Production Index fell by 1.5 percentage points from June to 49.9%, and the Purchases sub-index also dropped by 2 percentage points from June to 49.4%. The Business Expectations sub-index edged down by 0.2 percentage points to 54.1%. Sentiment declined across manufacturing enterprises of all sizes, with the PMIs for Large, Medium, and Small enterprises falling by 1.2, 0.8, and 0.8 percentage points respectively from June to 49.5%, 49.7%, and 47.4%. Regarding employment, the Manufacturing Employment Index rose by 0.5 percentage points in July from June to 49%, indicating a marginal recovery in hiring sentiment among manufacturing firms, though its sustainability remains to be seen.

2. Expansion Pace of Non-Manufacturing Business Activity Slowed

The Non-Manufacturing Business Activity Index fell by 1.2 percentage points from June to 49%. Among them, the Construction Business Activity Index dropped by 2 percentage points from the previous month to 47%, and the Services Business Activity Index fell by 1.1 percentage points to 49.3%. On one hand, business activity indices in sectors such as wholesale and monetary financial services saw significant declines. Sentiment in capital market services was also dragged down by stock market volatility, falling below the boom-bust line. On the other hand, extreme weather factors such as high temperatures, heavy rain, and flooding in some regions disrupted construction activities. High-frequency data shows that year-on-year starts in the real estate chain declined in July; for instance, the year-on-year decline in trading volume of construction steel widened to 16.6% in July, and the cement operating rate also fell by 3.2 percentage points year-on-year.

3. Price Sub-indices Continued to Fall, Easing Corporate Profit Pressure Marginally

In July, the PMI Input Prices and Output Prices indices continued to decline, marginally easing the squeeze on mid- and downstream corporate profits caused by upstream price hikes. Specifically, the Input Prices Index fell by 1 percentage point from June to 53.2%, and the Output Prices Index dropped by 0.4 percentage points from June’s 48.2% to 47.8%. The spread between the two narrowed from 6 percentage points in June to 5.4 percentage points, indicating that the pressure on mid- and downstream corporate profits from rising upstream raw material costs has weakened marginally. High-frequency data shows that the central tendency of raw material prices shifted downward overall in July. The average price of Brent crude oil fell by 0.9% month-on-month, while the average domestic prices of aluminum, rebar, cement, and thermal coal fell by 2.9%, 2.4%, 1.7%, and 4.9% month-on-month, respectively.

Source: Huatai RuiSi

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