China’s Factory Activity Falls Back Into Contraction

China Manufacturing PMI Falls to 49.5 Amid Weak Demand

China’s manufacturing sector experienced a renewed downturn in July 2025, with factory activity sliding into contraction due to weakening domestic and external demand. This trend underscores the ongoing challenges facing the world’s second-largest economy as it navigates sluggish recovery, export uncertainties, and cautious consumer spending.

According to S&P Global, the China General Manufacturing Purchasing Managers’ Index (PMI) fell to 49.5 in July, down from 50.4 in June. The decline marks the first contraction in three months and signals that factories are struggling to maintain momentum. A PMI below 50 indicates a contraction, reflecting a reduction in overall production and demand.

Key Drivers of the Slowdown

1. Soft New Orders:

   • The pace of new business growth has slowed, affecting production volumes.

   • Export orders remain weak due to global economic uncertainty and slower demand in key markets like the U.S. and Europe.

2. Cautious Domestic Consumption:

   • China’s domestic demand has not fully rebounded, with consumers prioritizing savings over spending amid economic uncertainties.

   • High youth unemployment and property market weakness have further dampened confidence.

3. Production and Supply Adjustments:

   • Many manufacturers are scaling back production to prevent excess inventory buildup.

   • Supply chain stability has improved compared to 2024, but rising operational costs continue to pressure factory margins.

Government and Market Implications

The weak PMI reading mirrors the official government manufacturing survey, reinforcing concerns that China’s industrial recovery remains fragile and uneven.

Economists suggest that Beijing may need to introduce additional stimulus, such as:

• Targeted subsidies for manufacturers,

• Lower interest rates, and

• Infrastructure investment to spur demand.

Global markets are closely watching China’s industrial output trends, as prolonged contraction in the manufacturing sector could affect global supply chains, commodity prices, and trade flows.

The next quarter will be critical, as China balances export challenges and domestic growth efforts. Sustained weakness could signal that post-pandemic recovery momentum is faltering, requiring stronger policy intervention to revive industrial performance.