Global Market: China's factory activity contracts unexpectedly in July; metal, commodity stocks may stay under pressure

China's manufacturing activity unexpectedly slipped into contraction in July, highlighting renewed weakness in the world's second-largest economy and reinforcing expectations that policymakers may need to roll out additional stimulus to support growth, according to Reuters.

The official manufacturing Purchasing Managers' Index (PMI) fell to 49.2 in July from 50.3 in June, dropping below the 50-mark that separates expansion from contraction and marking its weakest reading in five months. The figure was also below the median forecast of 50.0 in a Reuters poll.

The slowdown was not limited to factories. The official non-manufacturing PMI, which covers the services and construction sectors, also slipped into contraction, falling to 49.0 from 50.2 in June, its weakest level since December 2022.


The weaker-than-expected PMI readings add to signs that China's economic momentum is fading after growth slowed in the second quarter despite resilient exports. Strong manufacturing output and exports had helped cushion the economy from challenges including a prolonged property downturn, weak domestic demand and a sluggish labour market. However, recent economic indicators suggest that this support is losing strength.

China's economy expanded 4.3% year-on-year in the second quarter, slowing from 5.0% in the first quarter and falling below the government's annual growth target range of 4.5%-5.0%, increasing pressure on authorities to introduce more measures to boost consumption and investment.

The PMI data pointed to weakening demand, with the sub-index for new orders dropping sharply to 48.5 from 51.2 in June. New export orders also slipped into contraction at 49.6, indicating softer overseas demand.

The survey also highlighted uneven growth across industries. While production eased to 49.9, high-tech and equipment manufacturing remained in expansion territory, supported by global demand linked to artificial intelligence and advanced manufacturing. In contrast, consumer goods and energy-intensive industries continued to contract, reflecting weak domestic consumption and rising cost pressures.

China's composite PMI, which combines manufacturing and services activity, declined to 49.3 from 50.6 in June, indicating an overall contraction in business activity.

According to Reuters, China's Politburo acknowledged mounting economic challenges at its latest meeting and reiterated its commitment to supporting domestic demand. While policymakers pledged to implement existing policies more effectively and introduce new measures when necessary, they stopped short of announcing major fresh stimulus, leaving markets focused on the possibility of additional fiscal support in the coming months.

Impact on stocks
The weak factory data could weigh on Chinese equities, particularly companies linked to construction materials, industrials, steel, cement and chemicals, as slowing manufacturing activity signals softer domestic demand.

The data may also pressure global commodity prices, affecting mining and metal stocks across Asia, including companies exposed to iron ore, copper and steel demand.

For Indian markets, metals and mining stocks such as Tata Steel, JSW Steel, Hindalco and NMDC could remain sensitive to any decline in Chinese demand expectations, while export-oriented companies with significant exposure to China may also see cautious investor sentiment. At the same time, expectations of further Chinese stimulus could limit downside for commodity-linked stocks if investors anticipate stronger policy support in the months ahead.