China's factory activity improved in August on stronger demand but remained in contraction, while services activity stayed weak, underscoring deepening imbalances in the economy and fueling calls for policy measures to boost the economy. The divergence between manufacturing and service sectors suggests that China will continue to rely on manufacturing and exports to drive growth as momentum remains under pressure from lackluster domestic consumption and investment. The official manufacturing purchasing managers' index (PMI) picked up to 49.8 from 49.2 in July, remaining below the 50-mark separating growth from contraction, a survey by the National Bureau of Statistics showed on Monday. It beat the median forecast of 49.6 in a Reuters poll. NBS data showed both demand and output improved in August, with sub-indexes for new orders and production returning to expansion territory above 50. TOO EARLY TO PREDICT ECONOMIC RECOVERY "Domestic demand seems to be coming back, although it's more likely to have been driven by AI and exports than by policy expansion," said Xu Tianchen, senior economist at the Economist Intelligence Unit. Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, said it was too early to conclude the economy had rebounded. The non-manufacturing purchasing managers' index (PMI), which covers services and construction, remained unchanged at 49.0, matching July's reading, the weakest since December 2022. "Because China's services sector is primarily domestically focused, this suggests domestic demand remained relatively sluggish in August," Lynn Song, ING's Greater China chief economist, said in a note. "For now, the PMI data suggests that we are due for another month of relatively sluggish domestic activity data in August, with any potential rebound likely to be limited." The August PMIs for equipment manufacturing and high-tech manufacturing both came in above 51, while consumer goods and high-energy-consuming industries stayed in contraction, according to data released by the NBS. Zhang Liqun, an analyst with the China Federation of Logistics & Purchasing, said that with the manufacturing PMI reading still in contraction, business confidence remained unstable. "Continued government investment in public goods should be strengthened to effectively drive increased orders for businesses, continuously consolidate and enhance business confidence, and further strengthen factors contributing to economic stabilization and recovery." SIGNS OF PREVAILING WEAKNESS Economic data released earlier this month showed that growth remained under pressure at the start of the second half, with goods consumption and industrial output both slowing. Fixed-asset investment extended declines and the property market is still struggling to find a bottom more than five years into a slump. Exports remained a growth driver, helped by robust demand for AI-related shipments that lifted prices for Chinese-made high-tech goods, but the profit squeeze felt by manufacturers relying on domestic demand weighed on overall industrial profits. China's top leaders pledged in late July to introduce additional policies to support the economy as growth slowed to a more-than-three-year low of 4.3% in the second quarter, and vowed to accelerate fiscal spending on already-budgeted infrastructure projects for the remainder of the year. The finance ministry recently expanded loan interest subsidies for small private firms and consumers to spur demand, while the central bank said this month it would roll out measures without signaling explicit cuts to policy rates or banks' reserve-requirement ratio. ING's Song said the positive impact from interest subsidies "may be relatively marginal," and expects more measures in the weeks ahead. In a sign the government will not unveil large-scale stimulus, an article published this month in the People's Daily, the Communist Party's official newspaper, said China is not excessively reliant on strong policy stimulus and that it is capable of achieving its annual economic growth target.
