(Bloomberg) -- China’s economic activity lost more steam in July with manufacturing contracting again and the services sector weakening, as Beijing promises small measures of support to boost consumption. 

The official manufacturing purchasing managers’ index rose slightly to 49.3, beating economists’ estimates but still remaining below the 50 mark that separates expansion from contraction. The non-manufacturing gauge — which measures activity in the services and construction sectors — eased to 51.5, weaker than expectations. A sub-index focused on services waned to 51.5 from June’s 52.8.

“The problem of insufficient demand is still prominent,” Zhang Liqun, an analyst at the China Federation of Logistics & Purchasing, said in a statement. “Constrained by this, companies are still in a state of hesitation regarding production.” He called for more counter-cyclical policy, including faster government investment.

Investors are looking beyond the PMI weakness to potential economic support from the government. Officials have promised measures to boost consumption, having on Friday announced a raft of steps to help industries involved in home goods, food, plastic products, leather and other sectors. More policy details may come later Monday at a briefing held by the National Development and Reform Commission and other ministries.

The Hang Seng China Enterprises Index rose as much as 3.2% on Monday, outperforming major regional stock gauges. The yuan traded offshore advanced as much as 0.3% to a session high at 7.1329 per dollar.

Concerns about the state of China’s recovery have been mounting in recent weeks, with early indicators for July showing a weakening of momentum. Economists polled by Bloomberg project growth of 5.2% for 2023, lower than earlier forecasts and more in line with the official target of around 5%. 

More from the data:

  • New manufacturing export orders continued to decline, with the subindex inching down to 46.3 from 46.4 in the previous month
    • An employment subindex remained in contraction for a fifth straight month
  • A sub-index measuring non-manufacturing employment crept down to 46.6 from 46.8 in the previous month

“What worries me is that the employment sub indexes continue to stay below 50 and show no sign of recovery,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. He expects unemployment pressures to remain in the near term as millions of graduates join the labor market.

Companies reported an external environment that remains “complex and grim,” Zhao Qinghe, senior statistician at the NBS, said in a statement accompanying the data. “Reducing overseas orders and insufficient demand are still the main challenges for companies.”

Zhao added that the pace of expansion in services businesses has slowed, even though the overall size of activity in that sector continued to grow. 

What Bloomberg Economics Says ... 

“July PMIs suggest China’s overall economic momentum stayed weak at the start of 2H, but the underlying composition is shifting. The gauge tracking services showed unexpected deterioration, with the drag from the property slump outweighing the push from a brisk summer travel season.

— Chang Shu and Eric Zhu, economists

Read the full report here.

Adding to existing strains on the economy is extreme weather, with heat waves baking northeastern cities including Beijing and spreading to central coastal regions, while the southwest has been hit by heavy rain and deadly floods. The weather problems threaten to put stress on the energy grid and disrupt logistics, as well as production.

The property market, which is slumping again after an initial rebound, also provides reason for pessimism. Top leaders have signaled more support for the troubled real estate sector as well as a “holistic” package to address mounting local debt. But they still stopped short of offering major fiscal or monetary stimulus at a key meeting last week.

“While we believe that a great many micro measures will be implemented to improve the functioning of the economy, including a reduction in constraints on the private sector, we aren’t at all convinced that there is a fiscal bazooka waiting to fire up the economy,” wrote Robert Carnell, regional head of research for Asia Pacific at ING Groep NV.

--With assistance from Wenjin Lv and Tan Hwee Ann.

(Updates with market reaction, comments, more context.)

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