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[Caixin.com] China's manufacturing boom declined significantly in July, but supply still outstripped demand. Domestic demand was weak, the purchasing volume index fell below the boom-bust line, and the raw material inventory index fell accordingly.

The Caixin China Manufacturing Purchasing Managers' Index (PMI) for July 2024, released on July 1, recorded 49.8, down 2 percentage points from June. It was below the boom-bust line for the first time since November 2023, and the economic level has obviously declined.

The National Bureau of Statistics released the previous day's manufacturing PMI for July at 49.4, down slightly by 0.1 percentage point from the previous month, and has been below the boom-bust line for three consecutive months.

Judging from the sub-item data of Caixin China Manufacturing PMI, the manufacturing industry still shows a pattern of better supply than demand. The production index has remained in the expansion range for nine consecutive months, but it was only slightly above the boom-bust line in July, and the expansion of production was limited. The demand side performed even weaker, with the new order index falling into the contraction range for the first time since August 2023. The new order volume of investment and intermediate categories declined, while consumer categories continued to grow. According to the surveyed companies, weak demand and customer budget cuts have led to a recent decline in the total amount of new business. However, external demand has maintained its growth momentum, with new export orders growing for seven consecutive months, but at a slower pace.

Employment in the manufacturing industry was stable, with the employment index in July staying in the contraction range for 11 consecutive months, but only slightly below the boom-bust line. The employment scale of consumer goods manufacturers increased, while the employment of investment and intermediate products decreased slightly. The survey showed that some companies increased employment to cope with the subsequent workload, but some companies reduced employment due to the reduction in new business, and the two almost offset each other.

Due to the shortage of production materials, the completion of some orders was delayed, and the backlog index was above the boom-bust line for the fifth consecutive month; however, due to the decrease in new orders, the growth rate of the backlog index declined marginally, the lowest in nearly four months. The increase in production and the delay in outbound freight led to an increase in inventory, and the finished goods inventory index rose in the expansion range.

The decrease in new orders caused the purchasing volume index to be below the boom-bust line for the first time since October 2023. Enterprises were reluctant to increase their inventories of means of production, and the raw materials inventory index was below the boom-bust line for the first time this year.

Rising raw material prices continued to push up production costs for manufacturing companies, with the raw material purchase price index falling slightly from the expansion range; the ex-factory price index briefly exceeded the boom-bust line in June and returned to the contraction range in July. The survey showed that in view of the intensified competition, in order to boost sales, manufacturers lowered their sales prices, and the price cuts were mainly concentrated in investment categories.

The optimism of manufacturing entrepreneurs has slightly rebounded. The production and operation expectation index in July rebounded from the low point in June, but it is still below the long-term average. Although the decrease in new orders has led to a decrease in the total amount of new business, companies still believe that business expansion and the launch of new products will effectively promote sales improvement.

Wang Zhe, senior economist at Caixin Think Tank, said that in July, the supply of manufacturing industry expanded slightly, domestic demand declined, external demand was stable, procurement volume decreased, raw material inventory decreased, employment contraction stabilized, price level was under pressure, and the optimism of manufacturing enterprises rebounded slightly. Insufficient domestic effective demand and weak market optimistic expectations are still the most prominent problems at present. Stabilizing growth, promoting employment, protecting people's livelihood, increasing policy stimulus, promoting the implementation of previous policies, and stimulating market vitality and endogenous driving force with greater efforts should be the focus of recent policy work.