China PMI Falls Into Contraction as Manufacturing, Services Weaken in July

China's economic recovery lost momentum in July as both manufacturing and services activity unexpectedly slipped into contraction, highlighting persistent weakness in domestic demand despite resilient exports.

Official data released Friday by the National Bureau of Statistics (NBS) showed the manufacturing Purchasing Managers' Index (PMI) fell to 49.2 in July from 50.3 in June, missing economists' expectations of 50.1. The reading also marked the first contraction in factory activity since February 2026. A PMI reading above 50 signals expansion, while a figure below 50 indicates contraction.

The slowdown extended beyond factories. China's non-manufacturing PMI, which tracks the services and construction sectors, declined to 49.0 in July from 50.2 a month earlier, falling short of the expected 50.0. Meanwhile, the composite PMI, which combines manufacturing and services activity, dropped to 49.3 from 50.6, signaling broader weakness across the economy.

The disappointing figures underscore growing challenges facing the world's second-largest economy after second-quarter growth slowed to its weakest pace in more than three years. Although exports and high-tech manufacturing have remained relatively resilient, they have not been enough to offset weak domestic consumption and sluggish business activity.

China's economy continues to face headwinds from soft household spending, an extended property market downturn, and cautious business sentiment. These factors have dampened domestic demand and raised concerns over the sustainability of the country's economic recovery.

The weaker-than-expected PMI data is expected to strengthen market expectations that Beijing will introduce or maintain targeted stimulus measures to support growth. Investors will closely monitor upcoming policy announcements for signs of additional fiscal or monetary support aimed at boosting consumer spending, stabilizing the property sector, and improving business confidence.

With both manufacturing and services slipping below the key 50-point threshold, the latest PMI readings suggest China's economy entered the second half of the year on a weaker footing, increasing pressure on policymakers to take further action to revive growth.