China’s Economic Recovery Weakens

HONG KONG—Growth momentum in China’s economy showed continued signs of weakness in July, raising calls for Beijing to intervene more aggressively to prevent negative sentiment from taking root.

An official measure of Chinese manufacturing activity contracted for a fourth straight month in July, while a gauge of activity in the services sector—a driver of growth after China lifted its Covid-containment measures in January—fell to its lowest level this year.

The reading, released Monday by the National Bureau of Statistics, offers fresh evidence that the country’s economy is struggling to rekindle momentum after a short springtime revival.

China’s dimming economic picture also adds pressure on the global economy, which is relying in large part on China to sustain a postpandemic recovery as the U.S. and Europe—weighed down by lingering concerns around inflation—seek to fend off a recession.

In China, policy makers are confronting economic challenges including elevated youth unemployment, deflationary risks and a prolonged housing-market slowdown. In the second quarter of the year, China’s economy barely grew when compared with the first three months of the year, which enjoyed a brief rebound with the lifting of Covid restrictions.

“Policy support is needed to prevent China’s economy from slipping into a recession,” economists from London-based Capital Economics told clients in a note, predicting that cooling global demand for Chinese-made goods would likely persist.

Monday’s data underscored those risks, highlighting the softening of global demand for products that are made in China. A subindex of new export orders published Monday dropped to a six-month low, though total new orders improved slightly.

At the same time, demand within China has remained sluggish as consumers tighten their purse strings amid continued economic uncertainty.

China’s official manufacturing purchasing managers index rose slightly to 49.3 in July from 49 in June, still below the 50 mark that separates expansion from contraction. The result was slightly better than a reading of 49 expected by economists surveyed by The Wall Street Journal.

A subindex on employment dropped to 48.1 in July for a fifth straight month of contraction. China’s labor market is already facing record-high youth unemployment of 21.3%.

China’s official nonmanufacturing PMI softened to 51.5 in July from 53.2 in June, while a gauge of business activity in the services sector softened to 51.5 in July—the lowest level since December, when China scrapped its remaining “Zero Covid” measures, freeing consumers to dine out and resume travel after roughly three years of strict controls.

Construction activity, likewise, tumbled in July, suggesting that the property sector remains mired in a downturn as infrastructure spending is fizzling out. A subindex measuring the construction sector dropped to 51.2 in July—the lowest reading since February 2020—from 55.7 the previous month.

Robert Carnell, an economist at ING, expects that another sharp fall in the nonmanufacturing PMI could push it close to contractionary territory, offsetting any improvement from the manufacturing sector.

Despite the myriad headwinds, Beijing has been measured in its policy response, which economists say is unlikely to alter the country’s near-term trajectory.

In recent weeks, China’s leadership has signaled that more policy support is coming. The piecemeal nature of the measures that have been rolled out so far have generally disappointed expectations. Measures have tended to follow China’s traditional approach of relying on investment, rather than supporting households directly, which many economists argue Beijing must do more to help.

“So far, that has not translated into the sort of sizable fiscal policy stimulus many in the market have become used to expecting,” said ING’s Carnell. “We don’t think it is coming.”

China’s top economic planner, the National Development and Reform Commission, unveiled a host of measures on Monday to encourage domestic demand, including building more shopping malls in the countryside and telling local governments to ease limits on car purchasing.

The planning body also said it would renovate dilapidated houses in the countryside, a long-favored tactic aimed at ramping up housing demand, but one whose effectiveness economists have questioned given China’s shrinking population and high household debt levels.

Monday’s policy measures came after senior party and state officials jointly released a 31-point plan earlier to shore up the private economy and improve business sentiment. Various government agencies last week also outlined goals to boost consumer spending on cars and electric appliances, though no direct subsidies for households have been unveiled.

“Unless concrete support is rolled out soon, the recent downturn in demand risks becoming self-reinforcing,” economists from Capital Economics noted.

New-home sales continued to slump in July, according to a widely followed private indicator, despite recent government-led efforts to improve housing demand. The 100 largest developers in the country sold homes totaling the equivalent of $49 billion, the lowest monthly sum in three years, industry-data provider China Real Estate Information Corp. said on Monday. The sales were down 33% from July 2022 and were also about a third lower than June this year.

China’s top decision-making body, the Politburo, last week acknowledged the real-estate sector’s challenges and said housing policies need to be adjusted. Many cities responded by further dialing back property-purchase restrictions that were imposed when the market was booming.  

—Xiao Xiao, Grace Zhu and Cao Li contributed to this article.

Write to Stella Yifan Xie at [email protected]