The heavily scrutinized S&P Global China General Manufacturing PMI (formerly the Caixin Manufacturing PMI) dropped below the neutral 50 level to 49.4 in July (June: 50.4) as manufacturing output fell for just the second time since 2023. A fourth monthly contraction in new export orders and a weaker order book affected output across the sector.
The effects of weakening external demand on the manufacturing sector are affecting the broader economy. Retail sales increased 3.7% year-on-year in July, down sharply from June’s 4.8% rise, despite Beijing’s efforts to boost domestic consumption.
China’s housing sector woes continue to dent consumer sentiment. Yet, increased competition across the industrial sector is fueling cost pressures, forcing manufacturers to cut staffing levels or reduce wages to bolster profit margins. The net effect could be a further weakening in consumer sentiment and spending, challenging Beijing’s 5% GDP growth target.
Stock Market Gains Mask Fragile Confidence
Leading economist Hao Hong remarked on consumer sentiment trends and Beijing’s efforts to boost consumption, stating:
“There’s no quick fix to boosting household confidence except for a stock market rebound. This is a topic that we economists have been discussing in the closed-door meetings in Beijing.”
Wall Street Soars, China Waits for a Spark
On Monday, August 18, Mainland China’s CSI 300 climbed to a 10-month high, while the Shanghai Composite Index struck a 10-year high. Despite reaching new 2025 highs, the CSI 300 and the Shanghai Composite Index continue to trade well below their all-time highs.
In contrast, the Nasdaq Composite Index and the S&P 500 reached new record highs in August. US retail sales figures supported Hao Hong’s view on consumer sentiment and stock market trends. US retail sales rose 0.5% month-on-month in July after increasing 0.9% in June, reflecting robust demand.
Economists Split on China’s Path Ahead
However, a slowing economy may test demand for Mainland China-listed stocks, potentially leading to a reversal of year-to-date gains. Trade developments could be crucial since lower tariffs on Chinese goods may ease price pressures, bolster the labor market, and boost wages.
Natixis Asia Pacific Chief Economist Alicia Garcia Herrero shared her views on China’s economic outlook, stating:
“The economy’s outperformance in the first half makes the Chinese government’s 5% GDP growth target, which was set during the Two Sessions back in March, more realistic. More specifically, the third and fourth quarter will need an average GDP growth rate of 4.7%, which we believe is feasible under the current fiscal (and to a lesser extent monetary) stimuli.”
However, Garcia Herrero also warned that the economic momentum from the first half of the year could wane, adding:
“Without stronger and more lasting stimulus measures, particularly the ones targeting service consumption, sustaining the momentum from first half will be challenging.”
Garcia Herrero concluded:
“All in all, while the Chinese economy has a greater likelihood of meeting the government’s growth target, there are significant uncertainties down the road. Despite foreseeable headwinds from trade friction and persisting deflation, the government does have more bullets for further stimulus if needed. Therefore, we have revised our forecast of China’s GDP growth to 5% for 2025 and 4.5% for 2026.”
Hang Seng Defies Gravity in 2025 Rally
Despite economic uncertainty, Chinese and Hong Kong equities have posted strong gains in 2025:
- CSI 300: +4.02% in August, +7.74% YTD.
- Shanghai Composite: +4.33% in August, +11.23% YTD.
- Hang Seng Index: +25.51% YTD, outperforming both Mainland equity markets and the Nasdaq (+11.97% YTD).
While trade developments will continue to dominate market sentiment, sentiment remains hinged to Beijing’s next stimulus measures. A delay, combined with weakening data, could derail the current rally.
The Road Ahead: Stimulus or Stall?
US-China trade updates and Beijing’s stimulus plans will continue to influence risk assets in the coming weeks. However, upcoming economic indicators will also require consideration. Next week, July’s industrial profit data and August’s private sector PMI will offer further clues on whether Beijing can weather the tariff headwinds.
Ahead of next week’s data, the People’s Bank of China (PBoC) will set the loan prime rates on August 20. Economists expect the PBoC to keep the one-year and five-year LPRs at 3% and 3.5%, respectively.
Track our real-time updates on China trade policy and equity market trends, and consult our economic calendar.