A worker assembles a corn combine harvester at a factory in Qingzhou Economic Development Zone, east China’s Shandong Province, Aug. 31, 2024.
Cfoto | Future Publishing | Getty Images
An official survey released on Saturday showed China’s manufacturing activity fell to a six-month low in August as factory prices fell sharply and business owners struggled to secure orders, piling pressure on policymakers to push ahead with more stimulus plans for households.
The National Bureau of Statistics’ purchasing managers’ index fell to 49.1 in July from 49.4, the sixth straight monthly decline and the fourth month below the 50 mark that separates growth from recession. The reading missed the median forecast of 49.5 in a Reuters poll.
After a dismal second quarter, the world’s second-largest economy continued to lose momentum in July, prompting policymakers to signal they were ready to shift away from infrastructure spending and instead focus on new stimulus packages for households.
Sentiment among manufacturers remains gloomy as a years-long property crisis saps domestic demand and Western restrictions threaten Chinese exports such as electric vehicles.
Manufacturers reported factory prices were at their worst in 14 months, falling sharply from 46.3 in July to 42, while sub-indexes for new orders and new export orders remained negative and manufacturers continued to hold off on hiring.
“The fiscal policy stance remains quite restrictive, which may contribute to weakening economic momentum,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.
“To achieve economic stability, the fiscal policy stance needs to be more supportive. With the US economy slowing, exports may no longer be a reliable source of growth as they were in the first half of the year,” he added.
Policy advisers are weighing whether Beijing will decide in October to release part of next year’s bond issuance quota if growth shows no signs of bottoming out by the summer.
China made a similar move around the same time last year, with stimulus measures to lift the deficit to 3.8% of GDP from 3.0% and earmarking part of its 2024 local government debt quota to invest in flood protection and other infrastructure.
This time, however, analysts predict the government will look to set a cap amid weakening domestic demand.
Early encouraging signs
Retail sales beat forecasts last month, seemingly vindicating officials’ decision in July to allocate about 150 billion yuan ($21 billion) that China raised through ultra-long-term treasury bonds this year to subsidize the consumer barter program.
And the August non-manufacturing PMI, which includes services and construction, accelerated to 50.3 from 50.2, easing concerns that the economy was also entering recession.
Economists, however, are still waiting for more concrete plans to revive China’s 1.4 billion-strong consumer market beyond a pledge to do so from the ruling Communist Party’s top decision-making body.
It won’t be easy.
“I’m really not sure whether more (stimulus measures) can be rolled out,” said Xu Tianchen, senior economist at the Economist Intelligence Unit, given the scale of the barter program, which he said “will provide moderate support to the economy” and “seems to be welcomed by consumers.”
Moreover, any efforts to revive domestic demand are likely to be ineffective without further efforts to ease the severe downturn in the real estate sector, which has hit consumer spending hard over the past three years.
With 70% of household wealth held in real estate, which once accounted for a quarter of the economy, consumers still hold tight to their wallets.
A Reuters poll on Friday forecast house prices would fall 8.5% by 2024, deeper than the 5.0% fall suggested in a survey in May.
“I think officials will accept lower growth than 5% this year,” said Xu of the EIU, referring to Beijing’s annual growth target.
