China’s manufacturing sector contracted unexpectedly in July, signaling ongoing challenges in the country’s economic recovery. The official purchasing managers’ index (PMI) for manufacturing fell to 49.2 last month, dipping below the 50 mark that separates expansion from contraction and missing the median forecast of 50.1 from economists surveyed by Bloomberg. Meanwhile, construction and services activity, measured by the non-manufacturing PMI, declined sharply to 49.0 from 50.2 in June — marking the lowest level for construction since the onset of the COVID-19 pandemic.
The weakening data highlights a split within China’s economy, where strong export growth driven by artificial intelligence (AI) components contrasts with sluggish domestic demand and stagnant infrastructure investment. This divergence complicates policy efforts aimed at sustaining growth. China’s Politburo, which met on Thursday, signaled a cautious approach to stimulus, suggesting that existing measures may be adequate to meet the government’s annual growth target of 4.5 to 5 percent. This comes after the economy expanded by 4.3 percent in the second quarter, a slowdown that weighed on market sentiment amid one of the worst months for China’s stock market in a decade.
Official announcements offered few details on future policy actions but indicated an intent to “roll out pragmatic and effective new policies in a timely manner.” An immediate step will be to accelerate public spending, reversing a protracted decline that has restrained growth. The Communist Party’s Central Committee is scheduled to hold a plenary session in October, focusing on self-governance issues. This meeting is expected to be significant ahead of the leadership reorganization at the 21st Party Congress, slated for autumn 2027.
Recent diplomatic developments also point to ongoing tensions and negotiations with the United States. Chinese and U.S. trade representatives conducted talks to prepare for President Xi Jinping’s visit to the United States in September. These discussions addressed a wide range of trade frictions amid a fragile truce. Chinese Vice Premier He Lifeng expressed “serious concern” over recent U.S. actions, while U.S. Treasury Secretary Scott Bessent reiterated expectations for China to fulfill commitments related to rare earths and agricultural imports.
The technology sector featured both setbacks and successes during the week. Memory-chip maker CXTM saw its market value surge after a strong debut on Shanghai’s Star Market, while a supplier of optical transceivers in Hong Kong experienced initial declines before an AI-driven rebound. A Shanghai-based firm reportedly began mass production of chipmaking equipment, contributing to a significant increase in profits among major Chinese chipmakers during the first half of the year.
Amid geopolitical tensions, U.S. regulators banned imports of certain Chinese robotics and power inverters on national security grounds, targeting leading products like smart vacuum cleaners. The United States also imposed sanctions on semiconductor and shipping firms linked to Iranian oil shipments and support for Iran’s Mahan Air.
On the international front, Brazil’s President Luiz Inacio Lula da Silva agreed to accelerate discussions on a China-Mexico trade deal during a call with Xi Jinping, signaling a shift in Brazil’s longstanding position on the matter. Xi also welcomed Slovak President Peter Pellegrini, emphasizing potential cooperation in clean energy, robotics, and AI sectors.
Other notable developments involved finance and corporate sectors. China introduced new personal income taxes on offshore trusts to close tax avoidance loopholes and waived fees for panda bonds until 2028 to encourage yuan-denominated debt issuance by foreign firms. Online travel platform Trip.com was fined 5.2 billion yuan for monopolistic practices in the country’s largest recent antitrust ruling against an internet giant. Zijin Gold withdrew a proposed C$5.5 billion acquisition of Allied Gold after regulatory hurdles, opting instead for a minority stake in the Canadian miner.
In the automotive industry, electric vehicle manufacturer BYD announced plans to reveal its first humanoid robot this month. Brazil emerged as the largest market for Chinese vehicle exports, surpassing Russia after a doubling of shipments in the first five months of the year. A new generation of Chinese-built car carriers also made its inaugural voyage to Europe from Shanghai, transporting a record volume of vehicles.
Looking ahead, market watchers anticipate July trade data due Friday to show a slowdown in export growth to 22.3 percent from 27 percent in June, with imports also expected to ease. Additional economic indicators include S&P Global’s manufacturing and services PMIs, as well as U.S. trade balance data. Major Hong Kong financial institutions, including HSBC and Cathay Pacific, are set to release interim reports, with Cathay Pacific raising fuel surcharges due to rising oil prices.
Military activities will also be closely observed, as the People’s Liberation Army marks its 99th anniversary and Taiwan commences its annual Han Kuang military exercises featuring integrated urban resilience and simulated internet disruptions.
Regulatory changes are scheduled to take effect in China and Hong Kong this week, involving new renewable energy targets, consumer loan standards, and the launch of yuan-denominated treasury bond futures in Hong Kong — part of broader efforts to internationalize China’s currency. Hong Kong will also implement a new ride-hailing regulatory framework starting Monday.