Official data on Friday showed that China's factory activity fell more than expected in July. The country, which has faced a years-long real estate and consumption crisis, is also at loggerheads with the US and Europe over trade.
China's manufacturing sector has faced uncertainty this year, partly because of the war in the Middle East, which has driven up global energy prices and disrupted shipping. Booming exports underpinned by strong demand overseas for electronics and AI hardware have provided a lifeline as consumption at home remains weak.
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The manufacturing purchasing managers' index (PMI), a closely watched gauge of industrial health, fell into contraction territory at 49.2, data released by the National Bureau of Statistics showed on Friday. That was well below the 50.1 expansion forecast by a Bloomberg survey of economists, and also down from June's 50.3.
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"Domestic weakness appears largely to blame – while the export orders index softened a bit, it remains relatively strong compared to the past few years," wrote Julian Evans-Pritchard of Capital Economics. "The weakness will increase pressure on local governments to follow through on the Politburo's latest request for them to step up their spending," he said, referring to calls this week by a top decision-making body.
China's economy grew 4.3% year-on-year in the second quarter of 2026, the slowest pace in more than three years, official data showed this month. The persistent slump in domestic spending, as well as a years-long crisis in the once-roaring property sector, have left Beijing reliant on exports to achieve growth. The government's official growth target for this year is 4.5-5.0% – the lowest in decades. Indeed, many China experts suspect China's real growth figures are half of what they reveal.
Xi notes 'challenges'
In another stark sign of woes, the official non-manufacturing PMI, which measures activity in sectors such as services and construction, fell sharply to 49.0 in July, the data showed on Friday. That contraction was the most pronounced in more than three years. The reading indicated "a decline in the non-manufacturing sector's prosperity level" in July, NBS statistician Huo Lihui noted in a statement.
Huo said the "main factors" for the slump were "significant declines" in activity across wholesale trade and monetary financial services, while the real-estate sector was also "below the critical point". The lacklustre figures come one day after President Xi Jinping acknowledged "difficulties and challenges" facing the country's economy.
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