BEIJING • China economy watchers were left scratching their heads yesterday on the state of the nation's manufacturing in July.

An official factory gauge and a private manufacturing measure headed in different directions, with the government's reading slipping and Caixin Media and Markit Economics's figure released 45 minutes later jumping to the highest since February last year.

At last some investors focused on the stronger of the two, with the Hang Seng China Enterprises Index rallying. The Shanghai Composite slid amid continuing concern over potential curbs on wealth management projects.

The official manufacturing purchasing managers index was 49.9 last month, compared with June's reading of 50. Non-manufacturing PMI was at 53.9 compared with 53.7 in June. Numbers below 50 indicate conditions are deteriorating.

By contrast, manufacturing PMI from Caixin Media and Markit Economics jumped to 50.6 in July, from 48.6 in June, sparking hopes that some of the government's stimulus was starting to trickle down to smaller private firms.

The Caixin report tends to give more weight to light industry, whereas the official survey is skewed more towards heavy industries, said the CEBM Group's director of macroeconomic analysis Zhengsheng Zhong.

Both gauges at least suggest little significant deterioration in China's important manufacturing sector in July.

"The market is generally more inclined to take on the Caixin PMI reading," said Mr Zhou Hao, an economist at Commerzbank AG in Singapore. "We need to get in the middle of the two to get the whole picture. The emerging economies are generally on the rally, maybe we should believe that there is improvement and follow the money."

Heavy flooding, particularly along the Yangtze River, contributed to July's manufacturing contraction along with slowing demand and the cutting of overcapacity in some industries, the statistics bureau said.

Falling activity at smaller firms also was a key reason for July's poor figure, the bureau said, but performance at larger companies improved in a sign that the government is becoming more reliant on big state firms to generate growth.

"Today's data do not bode well for GDP growth in the second half," ANZ economists Louis Lam and David Qu wrote in a note.

Fiscal policy would be the key tool for boosting growth in coming months, while the central bank was expected to keep its policy settings accommodative, they added.

BLOOMBERG, REUTERS