Despite PMI's dip, economic stability seen in manufacturing

China's official purchasing managers index for manufacturing has dropped into contraction territory, while the Caixin PMI survey showed an upturn in operating conditions in this sector.

Analysts said that despite the divergence, the Chinese economy has shown signs of stabilizing.

The official manufacturing PMI, released on Monday by the National Bureau of Statistics and the China Federation of Logistics and Purchasing, fell to 49.9 in July, compared with 50 in June and 50.1 in May.

As an indicator gauging manufacturing activity and operating conditions, a PMI reading above 50 on the index indicates expansion of activities, while a reading below 50 signals contraction. The PMI survey mainly monitors medium-sized and large enterprises in China, and the Caixin index mainly focuses on small companies.

Although the official index dropped slightly, the bureau said the overall situation is stable.

Zhao Qinghe, a statistician with the bureau, attributed the slight decline in July to summer flooding, weak demand and capacity reduction in some traditional industries.

According to Zhao, the recent heavy rainfall and flooding nationwide, especially on the middle and lower reaches of the Yangtze River, have caused serious losses in production and transportation.

Moreover, sluggish market demand indicated by the declining fixed-asset investment growth rate in the first half of the year, especially in the private sector, and the reduction of excessive production capacity in some traditional industries have combined to contribute to the contraction in the manufacturing industry.

Zhao said that some subindexes showed positive signs. For instance, the high-tech manufacturing PMI reached 53.2 in July, up from 51.3 in June, marking the highest level since the beginning of this year.

This indicates that the leading role of the high-tech manufacturing sector in China's economic restructuring has been further strengthened, Zhao added.

The Caixin/Markit Manufacturing PMI has risen significantly from 48.6 in June to 50.6 in July, the first expansion in 17 months.

"The reading in July indicates that the Chinese economy has begun to show signs of stabilization due to the gradual implementation of proactive fiscal policy," said Zhong Zhengsheng, director of macroeconomic analysis at CEBM Group, a subsidiary of Caixin Insight Group.