Chinese authorities released additional policy guidelines on Monday but no concrete measures to boost the sputtering economy and domestic consumption, leaving investors wanting as dull activity data heightened pressure for officials to act.
Manufacturing activity in the world's second-largest economy fell for a fourth straight month in July while the services and construction sectors teetered on the brink of contraction, official surveys showed, threatening growth prospects for the third quarter.
But officials at a news conference called by the state planner gave only vague promises to "study and formulate policies", disappointing hopes that more stimulus was imminent after positive hints from a Politburo meeting this month - and a stock market rally that followed.
"Looking forward, policy support is needed to prevent China's economy from slipping into recession, not least because external headwinds look set to persist for a while longer," Julian Evans-Pritchard, head of China economics at Capital Economics, wrote in a note.
"Unless concrete support is rolled out soon, the recent downturn in demand risks becoming self-reinforcing."
The world's second-largest economy grew at a lumbering pace in the second quarter, as demand weakened at home and abroad, and some analysts now caution that the government's economic growth target around 5% could be at risk for a second year in a row.
Many analysts say policymakers may be reluctant to deliver any aggressive stimulus to boost domestic consumption, however, due to worries about growing debt risks, despite the urgency of the task.
"The sharp fall in construction activity is a worrying sign of a potential death spiral in the property sector," said Xu Tianchen, senior economist at the Economist Intelligence Unit.
"Meanwhile, we're seeing improvements in inventory levels, suggesting that with destocking nearing its end, China's manufacturing sector bottomed out in the second quarter," he added.
The manufacturing PMI inched up to 49.3 in July from 49.0 in June, staying below the 50-point mark that separates expansion from contraction.
The last time that indicator pointed to contraction for more than three consecutive months was between May and October 2019, before the pandemic, suggesting that negative sentiment among factory managers had become especially persistent.
The non-manufacturing PMI, which incorporates sub-indexes for service sector activity and construction, dropped to 51.5 from June's 53.2, while the sub-index for construction fell from a high of 65.6 in March to 51.2 this month.
China's top leaders earlier this month pledged to step up economic policy support, focusing on expanding domestic demand, boosting confidence and tamping down on risks, the Politburo, a top decision-making body of the ruling Communist Party, said.
But foreign investors say policymakers' words will need to be matched with substantive actions, especially around fixing the country's long-ailing and heavily indebted property sector, before confidence recovers.
Foreigners' net stock purchases in China for the year remain around 230 billion yuan ($32.2 billion), having more or less stalled after a net inflow of 186 billion yuan in the first quarter, as the economy lost its post-pandemic bounce.
Multinational companies are also seeking better financial or in-kind incentives and reassurance over an increasingly unpredictable regulatory environment.
The PMI data reinforced the key role that domestic consumption would need to play in reinvigorating the recovery, with a reading for new export orders showing a stepped-up pace of decline.
The PMI's overall sub-index for new orders also showed a contraction in July, albeit at a slower pace than the previous month, which "suggested further downward pressure for the coming months", said Dan Wang, chief economist at Hang Seng Bank China.
($1 = 7.1521 Chinese yuan renminbi)
