China’s manufacturing sector contracted in July, with the S&P Global Manufacturing PMI dropping to 49.5 from 50.4 in June, below market expectations. This sub-50 reading indicates a weakening in industrial output, raising concerns about China’s growth momentum as it enters the third quarter.
The survey revealed a decline in new export orders for the fourth consecutive month, with orders falling at an accelerated pace compared to June due to softened demand. Manufacturing output decreased after a slight improvement in June, as firms increasingly relied on existing inventories to satisfy orders, resulting in a second consecutive decline in finished goods stocks.
Manufacturing Concerns
Production contractions and stable backlogs led manufacturers to reduce staff in July amidst weak demand and rising cost pressures. Despite these challenges, business confidence saw a slight uptick, although it remained below the long-term average, with companies optimistic about improved economic conditions and marketing efforts potentially bolstering future sales.
Input prices increased for the first time in five months, influenced by Beijing’s efforts to curb destructive price competition. However, selling prices continued to fall as firms competed aggressively for new orders. Export prices rose at their fastest rate in a year due to heightened shipping and logistics costs. Analysts are now concerned about the diminishing boost from front-loaded exports ahead of U.S. tariffs. Potential factory capacity cuts and measures to address deflation risks and disorderly competition are being monitored.
With China’s manufacturing PMI falling back into contraction at 49.5, we see renewed weakness in the industrial sector. This confirms the concerns raised by the slightly disappointing 4.8% GDP growth we saw in the second quarter of 2025. Traders should be cautious about assets directly exposed to Chinese industrial demand in the coming weeks.
The sharp drop in new export orders is particularly worrying for industrial commodities. We have already seen the price of iron ore futures slip to around $105 per tonne this week, its lowest point in three months. Bearish derivative plays on materials like copper and steel may be prudent, as domestic demand also appears soft.
Market Reactions
This economic data puts downward pressure on the yuan, with the USD/CNH exchange rate already testing the 7.30 level. Given the weak PMI reading, betting on further yuan weakness through options or futures seems like a logical response. We saw a similar trend in mid-2024 when poor economic data led to a sustained slide in the currency.
For equity markets, the combination of falling output and manufacturers cutting staff signals trouble for corporate earnings. This suggests that buying put options on indices like the Hang Seng or the FTSE China A50 could be an effective hedge or speculative position. The pressure on firms to cut selling prices while their own input costs are rising will squeeze profit margins.
The slight uptick in business confidence creates uncertainty, which suggests an increase in market volatility. We can recall the stop-start recovery patterns of 2023 and 2024, where data would swing between brief optimism and renewed weakness. This environment could favor strategies that profit from large price swings, such as long straddles on major Chinese ETFs.
The boost from front-loading exports ahead of new U.S. tariffs, expected to take effect on September 1, 2025, is now likely to fade. This means the August and September data could look even worse as this artificial support disappears. Therefore, we should anticipate continued negative pressure on Chinese manufacturing metrics through the end of the third quarter.
