China’s manufacturing and services sectors moved into contraction in July, according to official purchasing managers’ surveys that showed a broad loss of economic momentum at the beginning of the third quarter. The manufacturing purchasing managers’ index fell to 49.2 from 50.3 in June, while the services business activity index declined to 49.3 from 50.4. Both readings were below the neutral 50-point level, where figures above 50 indicate an increase in activity from the previous month and readings below 50 indicate a decrease.

The National Bureau of Statistics said the broader non-manufacturing business activity index, covering services and construction, dropped to 49.0 from 50.2. The composite PMI output index, which combines manufacturing production and non-manufacturing business activity, fell to 49.3 from 50.6. The simultaneous declines showed that the slowdown extended across factories, consumer and business services, and construction rather than being concentrated in a single part of the economy.

The manufacturing result marked the sector’s first contraction in five months. The index had risen to 50.4 in March, held at 50.3 in April, stood at the expansion threshold of 50.0 in May and increased to 50.3 in June. Its 1.1-point July decline therefore represented an abrupt reversal after several months of stabilization. The statistics bureau attributed the downturn partly to a relatively high base following faster manufacturing growth earlier in the year and to the traditional summer production slowdown in some industries.

Underlying components of the manufacturing survey pointed to weakness in both supply and demand. The production index fell 1.5 points to 49.9, moving just below the expansion threshold. The new-orders index dropped 2.7 points to 48.5, indicating a more pronounced reduction in incoming demand. Because new orders carry the largest weight in the official manufacturing PMI, their decline was an important contributor to the fall in the headline index and may affect production scheduling, procurement and inventories in subsequent months.

External demand also softened. The new-export-orders index declined to 49.6 from 50.1 in June, while the imports index fell to 47.5 from 49.6. The purchasing-volume index dropped to 49.4 from 51.4, showing that manufacturers reduced their acquisition of materials and intermediate goods. These figures suggest that companies became more cautious as domestic orders weakened and overseas demand moved from slight expansion to contraction.

Other indicators showed that manufacturers continued to operate with limited order visibility. The backlog-of-orders index fell to 45.8 from 47.1, remaining substantially below 50. Raw-material inventories stood at 48.3, little changed from June, while finished-goods inventories increased to 48.6 from 47.7 but remained in contraction. The combination of lower new orders, reduced purchasing and weak order backlogs indicates that businesses were generally not preparing for a rapid near-term acceleration in demand.

The slowdown affected manufacturers of all sizes. The PMI for large companies fell to 49.5, down 1.2 points from June. Medium-sized manufacturers registered 49.7, while small companies recorded 47.4. All three groups were below 50, showing that weakness was not limited to smaller private businesses with more restricted financing access. Small manufacturers nevertheless remained the weakest group, consistent with their greater exposure to narrow margins, local demand and competitive price pressure.

Employment conditions remained subdued despite a modest monthly improvement. The manufacturing employment index rose to 49.0 from 48.5 but stayed below the expansion threshold. Supplier delivery times also moved into contraction at 49.5, which in the PMI methodology indicates that delivery periods lengthened. The statistics bureau said adverse weather and disruptions in some regions contributed to slower logistics and production conditions during the month.

Price measures continued to show a gap between input costs and manufacturers’ ability to raise selling prices. The index for major raw-material purchase prices stood at 53.2, remaining in expansion even after declining for a fourth consecutive month. The factory-gate price index fell to 47.8 from 48.2. That divergence indicates that many companies continued to face higher input costs while cutting or discounting output prices, a combination that can compress industrial profit margins.

The weakness was uneven across industrial sectors. High-technology manufacturing remained firmly in expansion, with its PMI at 53.3, while equipment manufacturing recorded 51.4. The production and new-orders indexes for general-purpose machinery and computer, communications and electronic equipment were both above 53, according to the official interpretation of the survey. These industries continued to benefit from investment in advanced manufacturing, digital infrastructure and technology-intensive production.

More traditional sectors performed less strongly. The consumer-goods manufacturing PMI fell to 47.8, and the index for energy-intensive industries stood at 47.0. Production and demand indicators for non-metallic mineral products, ferrous-metal smelting and processing, and automobiles were below 50. Weakness in building-material industries was consistent with subdued construction and real-estate activity, while the decline in consumer manufacturing highlighted continued caution in household spending.

Manufacturers nevertheless retained a comparatively positive view of future conditions. The production and business expectations index was 54.1, only slightly lower than June’s 54.3. Food and beverage producers and manufacturers of railway, ship and aerospace equipment reported particularly strong expectations, with relevant gauges above 60. The contrast between weak current activity and positive expectations suggests that companies anticipate policy support, seasonal normalization or improved demand, although those expectations had not translated into stronger July orders.

Conditions also deteriorated across the non-manufacturing economy. The headline business activity index fell 1.2 points to 49.0, its lowest level in more than three years. The services index declined 1.1 points to 49.3, while construction fell 2.0 points to 47.0. The scale of the construction decline reflected a combination of persistent property weakness and operational disruption from high temperatures, heavy rainfall and flooding in parts of the country.

Demand indicators within non-manufacturing were notably weaker than the headline activity measure. The overall new-orders index dropped 3.6 points to 44.4. New orders in construction fell 6.2 points to 40.1, while service-sector new orders declined 3.2 points to 45.2. The readings indicate that businesses were not only handling less activity during July but were also receiving fewer new contracts, raising the risk that softness could extend into August and subsequent months.

The services downturn was broad but contained several areas of expansion. Summer travel and leisure demand supported aviation, accommodation, cultural activities, sports and entertainment. Postal services, telecommunications, broadcasting and satellite transmission also reported business activity indexes above 55. These categories showed that consumer demand had not weakened uniformly and that spending connected to travel, recreation and communications remained comparatively resilient.

Other service industries exerted greater downward pressure. The statistics bureau said wholesale and monetary financial services recorded significant declines and were major contributors to the lower services reading. Capital-market services and real estate remained below the expansion threshold. Weak property activity continued to affect transactions, financing demand and related professional services, while financial-sector volatility weighed on some market-linked businesses.

Non-manufacturing price and employment indexes also remained soft. The input-price index was unchanged at 49.7, indicating a slight overall decline in operating costs, while the selling-price index fell to 47.9 from 48.4. Service providers and construction companies therefore continued to face pressure on the prices they could charge. The employment index declined to 45.4, with construction employment at 40.9 and services employment at 46.2, signaling reduced labor demand across both categories.

Expectations were more resilient than current activity. The non-manufacturing business-expectations index edged up to 55.4, with services holding at 56.0 and construction rising to 51.8. The data suggest that companies continued to anticipate an improvement despite reporting weaker activity, orders and employment in July. That optimism may reflect expectations of stronger public investment execution, continued support for consumption and a normalization of weather-related disruptions.

The composite output index’s fall to 49.3 provided the clearest evidence that the slowdown extended across the economy. The composite measure is calculated from the manufacturing production index and the non-manufacturing business activity index, weighted according to their respective shares of gross domestic product. Its move below 50 indicated that the combined output of surveyed manufacturing and non-manufacturing companies declined from June.

The PMI release followed official data showing that China’s economy expanded 4.3% from a year earlier in the second quarter, a slower pace than in the opening months of 2026. Growth has remained supported by industrial production and technology-related exports, but domestic demand indicators have been less robust. Retail sales increased 1.3% in the first half of the year, while fixed-asset investment excluding rural households fell 5.7%, including an 8.5% decline in non-governmental investment.

Those figures have reinforced concerns about the balance of China’s recovery. Advanced manufacturing and export-oriented industries have continued to contribute to output, while household consumption, private investment, property and construction remain weaker. The July PMI surveys reflected that divergence: high-technology and equipment manufacturing expanded, but consumer-goods manufacturing contracted; travel-related services improved, but property, financial and construction activity declined.

The data are likely to increase attention on the timing and composition of policy support. Broad credit expansion alone may have a limited effect when companies face weak orders and households remain cautious, making fiscal implementation, income support, service consumption and measures to stabilize property demand increasingly important. Policymakers have pledged to strengthen domestic consumption and support economic activity, but the July surveys suggest that existing measures had not yet produced a broad-based improvement in business demand.

For global markets, the downturn carries implications beyond China. The country is a major consumer of industrial metals, energy and other commodities, and weaker manufacturing purchasing can affect exporters and commodity producers. At the same time, continued expansion in advanced manufacturing may sustain Chinese exports of electronics, machinery, electric vehicles and other technology-intensive products, potentially reinforcing trade tensions with economies concerned about industrial overcapacity and pricing competition.

The next round of official data on industrial output, retail sales, investment, employment and property will show whether July’s PMI contraction was mainly a temporary result of seasonal and weather-related factors or the beginning of a more persistent slowdown. A recovery in new orders would support the official assessment that expectations remain stable. Continued readings below 50, particularly in demand and employment components, would strengthen the case for additional measures to support domestic activity during the second half of 2026.