China's manufacturing sector showed a clear improvement in business sentiment during August, though overall economic activity continues to operate below the expansionary threshold.

Data released by the National Bureau of Statistics on August 31 shows the manufacturing Purchasing Managers' Index (PMI) climbed to 49.8% last month, a rise of 0.6 percentage points from July, signalling a notable recovery in business conditions after a sluggish period.

Strikingly, both the production gauge and the new orders sub-index moved back into expansionary territory, while price indicators also rebounded markedly, with the factory gate price index climbing back above the boom-bust line for the first time in several months. Hu Lihui, Chief Statistician at the Service Industry Survey Centre of the National Bureau of Statistics, noted that manufacturing activity improved significantly across a broad front in August, with PMIs rising in 16 of the 21 industries surveyed.

Breaking the data down by sector, industries such as electrical machinery and equipment, alongside computer, communication and other electronic equipment, both saw their production and new order sub-indices exceed 53.0%, indicating a rapid release of both supply and demand. New growth engine industries continued to perform strongly, with the PMI for equipment manufacturing reaching 51.4%, while the high-tech manufacturing PMI stood at 52.9%, both remaining comfortably in expansion territory.

The uptick in raw material costs provided a significant boost to the manufacturing price gauges. Influenced by higher prices for crude oil and non-ferrous metals recently, the purchasing price index for major raw materials and the ex-factory price index climbed to 56.6% and 50.4% respectively, surging by 3.4 and 2.6 percentage points from the previous month.

Viewing the data by company size, the PMI for large enterprises was 50.6%, an increase of 1.1 percentage points month-on-month, placing it above the critical threshold. In contrast, the PMI for medium-sized firms came in at 49.4%, down 0.3 percentage points from July, while small enterprises registered a PMI of 47.9%, up 0.5 percentage points but still below the threshold that separates growth from contraction.

Turning to the non-manufacturing side, the business activity index held steady at 49.0% in August, unchanged from the previous month and broadly stable overall. The composite PMI output index registered 49.5%, a modest increase of 0.2 percentage points from July.

According to He Hui, Vice President of the China Federation of Logistics & Purchasing, both domestic and international market demand for manufactured goods expanded during August. The new orders index and the new export orders index both recorded noticeable gains compared to both the previous month and the same period last year, with the month-on-month change in market demand bettering the year-ago level. This suggests that intensified policy support has effectively strengthened the momentum behind economic development.

Looking at the broader picture, the manufacturing PMI remained below the 50-point mark in August, partly due to the impact of severe weather including high temperatures, typhoons and torrential rain. However, a combination of factors helped lift the index significantly from the previous month. These include more effective implementation of policies aimed at expanding domestic demand, a more visible guiding and multiplier effect from central budget investment, faster progress on 109 major projects and the "six networks" infrastructure plan, steady growth in summer holiday spending and rising international demand. All these elements point to a stabilising manufacturing sector with clearly improving business sentiment.

A closer look at the manufacturing PMI breakdown in August shows the headline figure at 49.8%, up 0.6 percentage points from the prior month, indicating improved activity levels.

By company scale, large enterprises recorded a PMI of 50.6% (up 1.1 points), medium-sized firms 49.4% (down 0.3 points) and smaller companies 47.9% (up 0.5 points), with only the large-firm gauge above the critical line. Among the five sub-indices that make up the manufacturing PMI, the production, new orders and supplier delivery time indices were all above the boom-bust threshold, while raw material inventory and employment indices remained below it. The production index stood at 50.4%, up 0.5 points, signalling an acceleration in factory activity. The new orders index climbed 2.1 points to 50.6%, pointing to a marked improvement in market demand. The raw materials inventory index dipped 0.2 points to 48.1%, indicating continued destocking of key inputs. The employment index fell 0.3 points to 48.7%, suggesting a slight cooling in labour demand among manufacturers. The supplier delivery time index rose 0.6 points to 50.1%, reflecting faster deliveries from raw material suppliers.

The non-manufacturing business activity index came in at 49.0% for August, unchanged from July. By sector, the construction business activity index was 46.9%, down 0.1 points, while the services business activity index held steady at 49.3%. Within services, industries including postal services, telecommunications, broadcasting and satellite transmission, plus internet software and IT services, all registered business activity indices above the 55.0% high-activity zone, whereas wholesale, retail and capital market services were all below the critical threshold.

The new orders index for the non-manufacturing sector was 44.1%, down 0.3 points from the previous month, indicating that overall market demand in the sector has softened somewhat. Construction new orders edged up 2.3 points to 42.4%, while the services new orders index slipped 0.7 points to 44.5%. The input price index rose 1.4 points to 51.1%, suggesting that costs for operational inputs across non-manufacturing firms are picking up, with construction input prices climbing 2.5 points to 51.2% and services input prices gaining 1.2 points to reach 51.1%. The selling price index increased 1.4 points to 49.3%, remaining below the threshold but indicating that the decline in prices charged by non-manufacturing firms is narrowing; construction selling prices rose 2.1 points to 49.8%, while services selling prices were up 1.3 points at 49.2%. Employment sentiment stayed weak, with the staffing index unchanged at 45.4%, below the critical line; construction employment rose 2.1 points to 43.0% while services employment slipped 0.4 points to 45.8%. Expectations for future activity edged down 0.4 points to 55.0%, though remaining comfortably in optimistic territory, with construction expectations steady at 51.8% and services expectations at 55.5%, down 0.5 points.

Finally, the composite PMI output index for August came in at 49.5%, up 0.2 percentage points from July, indicating that the overall operating climate for Chinese enterprises has picked up slightly.