Fragile Rays Pierce Chinese Economic Gloom

It’s typhoon season in Hong Kong, but up north on the Chinese mainland, the weather forecast cleared a bit on Wednesday.

The nation’s official July purchasing managers index, the first real read on the month’s growth, showed that service and construction activity kept expanding, albeit at a marginally slower pace. Meanwhile, manufacturing, which has been in the doldrums for months, nosed upward for the first time since March. Activity rose to 49.7 from 49.4 in June, nearing the 50-point mark that separates expansion from contraction. More important, the proportion of factories and service firms shedding, as opposed to hiring, workers was the lowest since April. And manufacturing orders and export orders both showed a milder decline than a month earlier.

All of these are welcome signs that China’s slowdown is abating, thanks to easier monetary policy and a fiscal boost from infrastructure investment in June. That said, it is risky to read too much into a single set of monthly data. Small and medium-size companies, a crucial source of employment, continue to struggle. And output is still growing fast, while orders are falling. As long as that imbalance persists, China remains at risk of a renewed bout of industrial deflation, which could trip up heavily indebted factories and cause big problems in the debt markets.

Notably, the recovery in new orders was entirely at large manufacturers. That may reflect a nascent recovery in auto sales or the boost from infrastructure spending. But without better times at export-focused small manufacturers and in the service sector, which drives most job growth, a sustainable recovery in consumer demand and income growth may prove elusive. Outside of food, consumer-price inflation remains anemic, suggesting demand remains weak.

The official readout from Tuesday’s meeting of the Politburo, the top leadership committee of China’s ruling Communist Party, emphasized cutting taxes and fees, helping private firms access long-term finance and “digging deep” to unleash the economy’s potential. That suggests top policy makers understand that small businesses and consumers are still on the ropes.

The challenge for the authorities now is finding a way to alleviate those strains without overheating the property market—which still looks relatively frothy—or giving too much ground on trade. That remains a very big ask.

Write to Nathaniel Taplin at nathaniel.taplin@wsj.com

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