High-tech underpins manufacturing

China's manufacturing sector proved resilient in July, with high-tech industries remaining firmly in expansion mode, even as overall factory activity saw a mild contraction amid a high comparison base and seasonal factors, official data showed.

As the economy transitions from old growth drivers to new ones, factory activity may rebound in the near term but remain in contraction territory, analysts said, reinforcing expectations of broader and stronger pro-growth support in the coming months.

With some countercyclical measures already in place and further policy space available, policymakers are well positioned to address weak domestic demand and cushion the economy against external uncertainty for the remainder of the year, they added.

The official purchasing managers' index for the manufacturing sector fell to 49.2 in July from 50.3 in June, slipping below the 50-point mark that separates expansion from contraction, data from the National Bureau of Statistics showed on Friday.

Huo Lihui, an NBS statistician, attributed the July decline in the headline PMI to a high comparison base following relatively rapid manufacturing growth in recent months and seasonal slowdowns in some industries.

Despite the decline in the headline index, advanced manufacturing remained a bright spot. The PMI for high-tech manufacturing came in at 53.3 in July, remaining firmly in expansion territory.

The PMI for equipment manufacturing, meanwhile, stood at 51.4, also signaling solid expansion.

"The solid performance was underpinned mainly by robust demand for chips and other high-tech products amid the global boom in AI investment, coupled with the ongoing transformation and upgrading of China's manufacturing sector," said Wang Qing, chief macroeconomic analyst at Orient Golden Credit Rating International.

Luo Zhiheng, chief economist and head of the research institute at Yuekai Securities, voiced a similar view, saying the expansion of high-end manufacturing is bolstering the resilience of China's industrial and supply chains while enhancing the economy's capacity to withstand external shocks and safeguard economic security.

Notably, the subindex tracking manufacturers' expectations for production and business operations stood at 54.1 in July, remaining well above the threshold and pointing to relatively upbeat expectations among manufacturers.

Looking ahead, Zhang Di, chief macroeconomic analyst at China Galaxy Securities, said the manufacturing PMI is expected to regain some lost ground in August as weather-related disruptions ease, though the extent of the rebound will largely hinge on whether demand stabilizes.

The subindex for production fell to 49.9 in July, down from 51.4 in June, while the subindex for new orders dropped to 48.5 from 51.2, the NBS reported.

Analysts said the latest data point to a persistent structural divide, with new growth drivers continuing to underpin economic activity while many traditional sectors linked to the property market remained in contraction, underscoring the need for more targeted policy support to shore up domestic demand and sustain growth momentum.

"Boosting domestic demand will remain at the heart of China's economic agenda in the second half," said Luo from Yuekai Securities.

Faster fiscal spending and deployment of bond proceeds, together with measures to unlock spending potential in the services sector, are expected to provide fresh impetus to both investment and consumption, Luo said.

A coordinated push on both supply and demand would help steady near-term growth while smoothing the shift from traditional growth drivers to new ones, he added.

Underscoring this policy focus, the National Development and Reform Commission, China's top economic regulator, said on Friday that it is working with relevant departments to formulate an implementation plan for its strategy to expand domestic demand for the 2026-30 period.