July Caixin PMI exhibits manufacturing facility exercise progress slips

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Workers work on a Panasonic SMT machine at Guiyang Zhenxin Technology Co., Ltd. in Guiyang, Guizhou Province, China, July 27, 2021.

Cost photo | Barcroft Media | Getty Images

Chinese factory activity growth declined sharply in July as demand fell for the first time in over a year, in part due to high product prices, a company survey on Monday showed, highlighting the challenges facing the world’s manufacturing hub.

The Caixin / Markit Manufacturing Purchasing Managers’ Index (PMI) fell last month from 51.3 in the previous month to 50.3, the lowest level since April 2020.

Analysts polled by Reuters had expected the index to fall to 51.1. The 50 mark separates growth from contraction every month.

The Chinese economy has largely recovered from the disruption from the coronavirus pandemic, but has faced new challenges in recent months, such as higher raw material costs, which weighed on industrial company earnings growth in June.

Policy makers have stepped up efforts to contain rising commodity prices, which have depressed manufacturers’ margins.

The weaker results from the private survey, which includes mostly export-oriented and small manufacturers, are broadly in line with an official survey released on Saturday that showed activity has been growing at the slowest rate it has been growing for 17 months.

“The economy is still under tremendous downward pressure,” said Wang Zhe, chief economist with Caixin Insight Group, in comments released with the data. High product prices dampened demand, particularly for consumer and intermediate goods, Wang said.

One sub-index for incoming orders has fallen sharply for the first time since May 2020, while another sub-index for production has fallen to the slowest expansion rate since March last year.

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Input prices continued to rise, albeit more slowly than in the previous month, but much faster than output prices, which put pressure on margins. Companies surveyed stated that raw material prices, especially for industrial metals, are still high.

“Market demand was sensitive to product prices, which limited companies’ pricing power,” said Wang.

Export orders grew slightly faster than the previous month, but still slowly as the pandemic dampened foreign demand. The factories hired more workers for the fourth consecutive month, but at a slower pace.

A confidence index for the coming year slipped to its lowest level in 15 months.

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