A worker assembles a corn combine harvester at a factory in Qingzhou Economic Development Zone, east China’s Shandong province, August 31, 2024.
Cphoto | Future Issue | Getty Images
China’s manufacturing activity fell to a six-month low in August as factory-gate prices fell and owners struggled for orders, an official survey showed on Saturday, forcing policymakers to press ahead with plans to direct more stimulus to households.
The Bureau of National Statistics’ purchasing managers’ index fell to 49.1 from 49.4 in July, the sixth decline and fourth month below the 50 mark that separates growth from contraction. It missed the median forecast of 49.5 in a Reuters poll.
After the second quarter, the world’s second-largest economy lost momentum in July, prompting policymakers to signal they were ready to deviate from the playbook to spend on infrastructure projects, instead of targeting new stimulus at households.
Sentiment remains bleak among manufacturers as a years-long property crisis keeps domestic demand in the doldrums and a Western clampdown on Chinese exports such as electric vehicles.
Producers reported factory gate prices were the worst in 14 months, plunging to 42 from 46.3 in July, while new orders and new export orders sub-index remained strong in negative territory and manufacturers maintained the hiring stop.
“The stance of fiscal policy remains quite restrictive, which may lead to weak economic momentum,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.
“To achieve economic stabilization, the stance of fiscal policy should become more supportive. With the US economy slowing down, exports may not be as reliable a source of growth as in the first half of the year,” he added.
Policy advisers are wondering whether Beijing could decide in October to bring back part of its bond issuance quota next year if growth shows no signs of slowing in the summer.
China made a similar move at the same time last year with a stimulus that increased the deficit to 3.8% of GDP from 3.0% and the front part of the 2024 local government debt quota to invest in flood prevention and other infrastructure.
However, this time, analysts expect the authorities to try to improve the situation in depressed domestic demand.
Early encouraging signs
Retail sales topped last month’s forecast, apparently justifying a July decision by officials to allocate about 150 billion yuan ($21 billion) China raised through ultra-long treasury bonds this year to subsidize a trade scheme for consumer goods.
And the August reading of the non-manufacturing PMI, which includes services and construction, eased to 50.3 from 50.2, allaying fears that it may also enter a period of contraction.
Still, economists are waiting for more specific plans to revive China’s 1.4 billion-strong consumer market beyond promises from the Communist Party’s top decision-making body to come.
It won’t be easy.
“I’m not sure if more (stimulus) can be launched,” said Xu Tianchen, a senior economist at the Economic Intelligence Unit, on the scale of the trade scheme, which he said “will provide moderate support to the economy.” and “seems to be welcomed by consumers.”
What’s more, any efforts to revive domestic demand will be ineffective unless further efforts are made to ease the slump in the property sector, which has weighed on consumer spending over the past three years.
With 70% of household wealth held in real estate, which at its peak accounted for a quarter of the economy, consumers are keeping their wallets closed.
A Reuters poll on Friday forecast house prices will fall 8.5% in 2024, deeper than the 5.0% decline in the May survey.
“I think officials will settle for something lower than 5% this year,” the EIU’s Xu said, referring to Beijing’s annual growth target.
