The official manufacturing PMI for China in July 2025 stands at 49.3, falling short of the predicted 49.7. This marks the fourth straight month of contraction, with a decrease in export surges and sluggish domestic demand.
The non-manufacturing PMI records a figure of 50.1, indicating slight expansion but at its lowest since last November, deviating from the expected 50.3. The composite PMI is noted at 50.2, down from the previous 50.7.
Ongoing Structural Issues
There are ongoing structural issues in trade talks between China and the US. In the coming days, further insights are anticipated from the unofficial Caixin/S&P manufacturing and non-manufacturing PMIs, which offer a different perspective from the official figures.
The fourth straight month of contraction in manufacturing is a significant red flag for China’s economy. With both exports and domestic demand looking weak, we should anticipate a risk-off sentiment building over the coming weeks. This data, missing expectations, suggests previous stimulus measures are failing to gain traction.
We are looking at potential downside for industrial commodities, especially those sensitive to Chinese construction and manufacturing. For instance, with iron ore currently trading around $107 per metric ton, this data puts significant pressure on prices. Derivative traders might consider short positions on copper and oil futures or puts on major mining stocks.
Currency Markets Impact
The Australian dollar, a key proxy for Chinese economic health, is likely to face headwinds. We’ve seen the AUD/USD pair struggle to hold above the 0.6600 level recently, and this news could trigger a break lower. Similarly, we expect the Chinese Yuan to weaken, with traders testing the People’s Bank of China’s resolve to see if they allow the USD/CNH to push past the 7.30 mark.
For equity markets, this points towards underperformance for Chinese-listed stocks and funds like the FXI ETF. Looking back at the persistent property sector issues and weak consumer confidence of 2023 and 2024, investor patience is wearing thin. With the VIX volatility index having been relatively subdued, buying call options on it could be an inexpensive way to hedge against a broader market downturn spurred by these concerns.
