China’s manufacturing sector unexpectedly contracted in July as new export orders dropped, underscoring the effect of US tariffs on trade terms.
The S&P Global China General Manufacturing PMI fell from 50.4 in June to 49.5 in July, dropping below the neutral 50 level. Economists had expected a decline to 50.2.
The July survey highlighted the following key trends:
Jingyi Pan, Economics Associate Director at S&P Global Market Intelligence, commented:
“Central to the drop in production was a slowdown in new orders growth. While successful business development efforts within the domestic market were able to sustain higher new work inflows, overall sales growth was only fractional as demand from overseas remained subdued on the back of global trade uncertainty.”
On pricing, Jingyi Pan added:
“Pricing power also remained weak, with companies cutting their selling prices even amid a fresh rise in input costs.”
The forex markets responded promptly to the PMI release. The AUD/USD fell from $0.64297 to a low of $0.64249. Despite the initial dip, the AUD/USD rebounded slightly and was up 0.02% at $0.64261 at the time of writing.
The Aussie dollar remains exposed to Chinese economic data, given that China accounts for one-third of Australian exports. With a trade-to-GDP ratio of over 50%, weaker demand from China could impact the Aussie economy and the RBA rate path.
During July’s press conference, RBA Governor Michele Bullock highlighted the potential impact of China’s trade terms and Beijing’s stimulus plans for the policy outlook, stating:
“Trade terms with China remain crucial. If China bolsters its economy with fiscal stimulus, that could cushion the impact of tariffs on Australia’s economy.”
The Hang Seng Index was up 0.18% to 24,819 ahead of the PMI release. However, the Index fell to a low of 24,745 in response to the PMI data, before steadying. At the time of writing, the Hang Seng Index was down 0.09% to 24,751.
The continued decline in external demand will keep the market focus on US-China trade developments and Beijing. Stalled trade talks may pressure Beijing to introduce effective stimulus to boost domestic demand. AUD/USD and the Hang Seng Index could benefit from fresh measures. However, the absence of effective stimulus and weakening external demand could weigh on demand for the Aussie dollar and Hong Kong-listed stocks.
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With over 28 years of experience in the financial industry, Bob has worked with various global rating agencies and multinational banks. Currently he is covering currencies, commodities, alternative asset classes and global equities, focusing mostly on European and Asian markets.