China’s manufacturing sector improved in August, but the recovery remained too weak to pull factory activity back into expansion. The official manufacturing purchasing managers index rose to 49.8 from 49.2 in July, beating market expectations but remaining below the 50 threshold that separates expansion from contraction. The result marked a second consecutive month of contraction and showed why Beijing continues to face pressure to strengthen domestic demand rather than rely disproportionately on exports and selected high-technology industries.

The August data contain some encouraging signals. Production increased to 50.4 and new orders rose to 50.6, while new export orders returned to expansion at 50.1. Sixteen of the 21 manufacturing industries surveyed recorded improvement from the previous month. Yet employment and raw-material inventories remained below the expansion threshold, while smaller companies continued to contract more sharply than large firms.

That combination points to an economy in which parts of manufacturing are responding to stronger orders, but the improvement has not yet become broad enough to establish a sustained industrial recovery. China’s second-quarter economic growth slowed to 4.3 percent, while weakness in property, consumer spending and investment continues to limit the contribution of domestic demand.

The significance of the August reading therefore lies less in the improvement from July than in what it says about the composition of China’s growth. Factories connected to technology and external demand are performing better, but sectors more closely tied to household consumption, property and traditional industrial activity remain under pressure.

Factory improvement is still too narrow

The rise in new orders is one of the more positive elements of the August survey. The new-orders index increased by 2.1 points to 50.6, moving into expansion territory after falling below 50 in July. Production also crossed back above the threshold, suggesting that factories were responding to stronger demand rather than simply accumulating unsold goods.

However, the improvement needs to be interpreted carefully. A manufacturing PMI of 49.8 still indicates that overall activity remained marginally in contraction. Moreover, the recovery is uneven across company sizes. Large manufacturers moved into expansion, with their PMI reaching 50.6, while medium-sized firms remained at 49.4 and small companies fell to 47.9.

That divide matters because smaller manufacturers often have less financial capacity to withstand weak orders, tight margins and uncertain investment conditions. Their continued contraction suggests that the improvement visible in headline manufacturing data has not yet reached the broader industrial base.

The employment index also remained below 50 at 48.7. This indicates that improving production and orders have not yet translated into an expansion of manufacturing employment. That is significant for an economy attempting to strengthen household consumption, because stronger domestic demand ultimately depends partly on employment, income expectations and confidence.

The August figures therefore provide evidence of stabilisation rather than a decisive industrial turnaround. Production is improving, but the labour market and smaller businesses remain weaker links in the recovery.

Exports are cushioning domestic weakness

One of the clearest features of China’s economy this year has been the continuing strength of exports. The August manufacturing survey showed new export orders rising above 50, while broader trade data have also indicated strong overseas demand. Chinese exports have benefited from competitive manufacturing capacity and strong global demand for technology-related products, including goods connected to the artificial intelligence investment cycle.

This external demand has become particularly important because China’s domestic economy has not generated comparable momentum. The property downturn continues to weigh on investment and confidence, while consumer spending has remained insufficiently strong to compensate for weaker construction and property-related activity.

The dependence on exports, however, creates another vulnerability. China’s manufacturers are increasingly competing for overseas markets at a time when trade tensions and protectionist policies are reshaping global supply chains. The United States has imposed higher tariffs on a range of Chinese goods, while Europe and other major markets are also scrutinising China’s industrial competitiveness in areas such as electric vehicles, batteries and clean-energy equipment.

That means export growth can cushion domestic weakness without necessarily providing a permanent solution. If foreign demand remains strong, manufacturers can continue operating at relatively high capacity. But if trade barriers rise or overseas demand weakens, the pressure would return more directly to the domestic economy. The August PMI therefore reinforces the importance of Beijing’s efforts to increase domestic demand. A recovery based primarily on exports and selected technology sectors would leave substantial parts of the economy exposed to external shocks.

Property weakness remains a major drag

The manufacturing figures also cannot be separated from China’s continuing property-sector problems. Construction activity remained particularly weak in August, with the construction component of the non-manufacturing survey falling to 46.9. Overall non-manufacturing activity remained at 49.0, meaning services and construction together were still in contraction.

The property downturn has broader consequences because real estate has historically been closely connected to household wealth, construction, local government finances, materials demand and employment. Weak property investment therefore affects much more than developers and homebuilders.

The persistence of this weakness helps explain why a stronger manufacturing PMI does not necessarily indicate that the wider economy has entered a sustained recovery. Technology manufacturing can expand even while property construction contracts, but the two sectors have very different effects on employment, household confidence and local economic activity.

Beijing has been increasing policy support, including measures designed to expand financing for smaller businesses and encourage government spending. Authorities have also moved toward further support for the property market, including changes intended to reduce risks associated with housing projects and improve the market for completed homes.

The challenge is determining how much stimulus is required and where it should be directed. Large-scale stimulus could support activity quickly, but policymakers have also been cautious about repeating the debt-heavy investment model that contributed to existing imbalances. The current policy approach has consequently focused more heavily on targeted support rather than an unrestricted expansion of spending. That approach may help stabilise activity, but it also means the recovery could remain gradual if household demand does not strengthen more convincingly.

Beijing faces pressure to broaden the recovery

The August manufacturing figures give Chinese policymakers some reason for confidence, but not enough to remove the need for further support. Production and new orders have returned to expansion, export orders have improved and high-technology manufacturing continues to outperform weaker traditional sectors. Yet the headline PMI remains below 50, services and construction remain weak, employment has not improved and smaller manufacturers continue to contract.

This is why the distinction between stabilisation and recovery is important. Stabilisation means the pace of deterioration has slowed. A genuine recovery would require broader improvements across consumption, investment, employment, property and services. The August data show more evidence of the former than the latter. Government spending could provide additional support in the second half of the year, particularly if local authorities accelerate infrastructure investment and project approvals. But fiscal spending alone cannot fully resolve weak consumer confidence or the structural problems created by the property downturn.

The stronger performance of high-technology manufacturing offers one potential source of longer-term growth. The production and new-orders measures for electronic machinery, equipment and computer and communications equipment were above 53 in August, demonstrating that China’s industrial strengths remain concentrated in technologically advanced sectors. The problem is that these sectors cannot by themselves guarantee a balanced recovery. China needs growth to spread from export-oriented and technology-intensive manufacturing into services, household consumption and smaller businesses. Until that happens, the economy remains dependent on a relatively narrow set of growth engines.

The August PMI therefore presents a mixed picture. China’s factories are showing signs of improvement, and the better-than-expected reading reduces the immediate pressure for aggressive stimulus. But the fact that manufacturing remains below the expansion threshold for a second month, while services, construction and employment remain weak, suggests that the underlying demand problem has not been resolved.

For Beijing, the policy challenge is increasingly clear: the priority is not simply to prevent manufacturing from contracting, but to create enough domestic demand for the improvement in factory orders to become a broader economic recovery. Without that transition, China’s industrial strength can continue to coexist with weak household demand, a troubled property sector and an economy that remains more dependent on exports than policymakers would prefer.

(Adapted from Asia.Nikkei.com)