China’s manufacturing sector shrank in July, with the S&P Global Manufacturing PMI falling to 49.5, down from 50.4 in June. This number, below the 50 mark, suggests a decline in industrial output and raises concerns about China’s economic growth as it heads into the third quarter. The survey showed that new export orders dropped for the fourth month in a row. These orders fell faster than in June due to weaker demand. Manufacturing output also decreased after a small rise in June. Companies relied on their existing inventories to meet orders, leading to a second straight decline in finished goods stocks.

Manufacturing Concerns

With production slowing and backlogs stable, manufacturers cut jobs in July due to weak demand and rising costs. Although business confidence slightly improved, it still lags behind the long-term average. Companies remain hopeful that better economic conditions and marketing efforts will boost future sales. Input prices went up for the first time in five months, partially due to Beijing’s efforts to limit damaging price wars. However, selling prices continued to drop as companies fiercely competed for orders. Export prices increased at the fastest pace in a year, driven by rising shipping and logistics costs. Analysts are worried about the fading impact of exports ahead of U.S. tariffs. They’re also watching for possible factory capacity cuts and measures to tackle deflation risks and disordered competition. With the manufacturing PMI at 49.5, there’s renewed concern about the industrial sector. This aligns with the below-expectation 4.8% GDP growth recorded in the second quarter of 2025. Traders should be cautious about assets tied to Chinese industrial demand in the upcoming weeks. The significant decline in new export orders is especially concerning for industrial commodities. Iron ore futures have already dropped to about $105 per tonne, the lowest in three months. It may be wise to place bearish bets on materials like copper and steel, as domestic demand appears weak.

Market Reactions

This economic data is putting downward pressure on the yuan, with the USD/CNH exchange rate nearing 7.30. Given the weak PMI reading, it seems logical to bet on further yuan weakness using options or futures. A similar trend occurred in mid-2024 when bad economic data caused the currency to slide. For stock markets, the drop in output and job cuts among manufacturers indicates potential trouble for corporate earnings. This suggests that buying put options on indices like the Hang Seng or the FTSE China A50 could be a good strategy for protection or speculation. Firms facing pressure to lower their selling prices while their own costs rise will feel the pinch on profit margins. The slight rise in business confidence introduces uncertainty, which could lead to more market volatility. We can remember the inconsistent recovery patterns of 2023 and 2024, where data fluctuated between brief optimism and renewed weakness. This climate may favor strategies that benefit from large price fluctuations, such as long straddles on major Chinese ETFs. The temporary boost from early exports ahead of new U.S. tariffs set for September 1, 2025, is likely to fade. Consequently, data for August and September may be even worse as this artificial support disappears. We should expect ongoing negative pressure on Chinese manufacturing indicators through the end of the third quarter. Create your live VT Markets account and start trading now.

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