The official manufacturing PMI for July 2015 came in at 50, a 5-month low, revealing expectations for zero growth in China's manufacturing sector. The data, released by the National Bureau of Statistics, was slightly lower than expectations of a marginally-growing 50.1, and was again at odds with private survey data released earlier in the month which showed outright contraction.
China's manufacturing sector, which has historically contributed approximately one third of overall economic output, is clearly a key industry influencing the country's growth prospects.
Although the Caixin/Markit survey and official readings may differ (the former well into the contraction zone, the latter pointing to neither expansion nor contraction), both appear to confirm the idea that China's economy is facing persistent challenges to growth.
While recent media headlines have been fixated on China's equity markets, speculating whether or not pressures there will spill over into the real economy, this latest data suggests that the real economy deserves a closer look.
Disparate conditions for large and small firms continued the recent trend of larger firms with a generally better outlook than smaller companies. All three of the size-based PMI indexes were lower for the month, and even though the large and medium-sized enterprise PMIs were lower vs. last month, remained above contraction territory. The small-sized PMI index fell to 46.9, matching the low in March, and marginally higher than the worst reading of 2015, 46.4, which was recorded in January.
Looking at the PMI data sub-indexes, there was a clear trend of softening data. The new orders index dropped into contraction territory for the first time in almost 3 years, and both internal and external demand was lower as shown by slumping new export import order indexes. The employment index was also softer in July, falling to a 3-month low of 48, and nearly matching lows for the year recorded in the seasonally slow Q1.
The purchase price index for main raw materials was again showing contraction for the twelfth month in a row, suggesting that deflationary pressures are mounting.
For domestic equity investors, the weak data may not have the same implications as previous unfavorable economic news items. The Shanghai Composite has been rallying on bad news of late, the theory apparently being that "bad news was good" because it signaled additional stimulus were likely. However, with the recent A-share rout, and the government's inability to halt the slide without unprecedented intervention measures, markets may be closer to a crisis in confidence.
The recent market rally has been built on a bedrock of a "Beijing put" providing a floor in stock prices, which is only as good as the degree of confidence in authorities' ability to force a particular outcome.
Whether or not the market has reached the sobering reality check that "this time it isn't different" remains to be seen, and when looking at the chart of the Shanghai Composite, resting close to support on its 200-day moving average, any move lower could see a vacuum below.