China’s factory activity unexpectedly contracts in July

China’s factory activity unexpectedly contracted in July for the first time since February, as the export rush that powered a second-quarter rebound began to unwind, piling pressure on Beijing to boost domestic demand.

The official manufacturing purchasing managers’ index fell to 49.2 from 50.3 in June, National Bureau of Statistics data showed Friday, dropping below the 50-point threshold that separates expansion from contraction. Economists’ median forecast had pegged PMI at 50.

PMI ended a 3-month expansion streak that was propped up by exporters rushing shipments ahead of U.S. tariff increases. It was the weakest reading since February.

The print lands a day after the country’s top policymakers acknowledged “difficulties and challenges facing the economy” at its mid-year meeting, pledging to accelerate fiscal spending and roll out “incremental policies” to shore up growth in the second half.

China’s economy in the second quarter expanded 4.3% from a year earlier, the slowest pace in more than three years, missing the lower end of the full-year target of 4.5% to 5%.

Exports have been one of the economy’s few reliable growth engines this year — and that engine is now showing signs of strain. “U.S.-bound shipments fell outright for the first time in several months,” according to a survey conducted by China Beige Book.

The research firm found factory activity decelerated in July, with manufacturing posting the worst performance on employment as job growth deteriorated across all sectors surveyed from a year earlier.

That marks a sharp reversal from June, when shipments to the U.S. rose 14%, helping overall exports surge 27% — the fastest pace in nearly five years — as businesses frontloaded orders ahead of expected higher American tariffs later in the summer. Manufacturers had braced for additional levies from President Donald Trump’s Section 301 probes after the 10% broad-based duty expired on July 24.

Retail sales fell in July from both the prior month and a year earlier, China Beige Book found, with travel and restaurants seeing a sharp on-year downturn.

The disappointing data will likely sharpen expectations for easing, though the Politburo readout stopped short of concrete policy steps.

Chinese leaders see growth at risk of falling below target in the second half, as new-economy sectors such as AI fail to offset the slowdown in traditional industries, Eurasia Group analysts said in a note after Thursday’s meeting.

“Officials continue to prioritize risk containment over near-term growth,” Eurasia Group said, framing property, local government debt and smaller financial institutions as structural risks to manage over time rather than problems to solve quickly.

— CNBC’s Evelyn Cheng contributed to…