China’s manufacturing sector recorded a sharp decline in August, with factory activity falling to a six-month low, according to the latest data from the National Bureau of Statistics.
The Purchasing Managers’ Index (PMI) dropped to 49.1, down from 49.4 in July, marking the fourth consecutive month the index has remained below the crucial 50-point threshold that separates growth from contraction. The downturn has raised concerns among policymakers, who are now under increasing pressure to introduce more stimulus measures aimed at boosting consumer demand.
The PMI figures for August underline the ongoing challenges faced by China’s manufacturing sector. Factory gate prices, a key indicator of the cost of goods as they leave the production line, fell to their lowest level in 14 months. The sub-index for factory gate prices plunged from 46.3 in July to 42.0 in August, reflecting the difficulties manufacturers are experiencing as they contend with declining orders and an uncertain export environment.
Adding to the woes, both the new orders and export orders sub-indices remained in negative territory, indicating continued weakness in both domestic and international demand. The persistent decline has led many manufacturers to halt hiring, further exacerbating concerns about the health of the broader economy.
Shift in Policy Focus
In response to the ongoing economic challenges, Chinese policymakers are signalling a shift away from their traditional reliance on infrastructure investment as a primary tool for economic stimulus. Instead, there is growing recognition of the need to support household spending, particularly in light of the prolonged slump in the property market, which has been a significant drag on consumer confidence and spending.
Zhiwei Zhang, Chief Economist at Pinpoint Asset Management, noted that the current fiscal policy remains restrictive, which may be contributing to the weak economic momentum. Zhang emphasised that a more supportive fiscal policy is necessary to stabilise the economy, particularly as exports, which have been a reliable source of growth in the past, may not provide the same level of support in the coming months due to a slowing U.S. economy.
Potential for Further Stimulus
Speculation is mounting that Beijing may consider bringing forward part of next year’s bond issuance quota if growth does not show signs of improvement by October. This move would echo a similar strategy employed last year when China increased its deficit to 3.8% of GDP and advanced part of the 2024 local government debt quotas to fund infrastructure projects, such as flood prevention.
However, analysts believe that this time around, the focus will likely be on stimulating domestic demand rather than on large-scale infrastructure investment. Retail sales data for July offered some encouragement, exceeding expectations, and lending support to the government’s decision to allocate approximately 150 billion yuan ($21 billion) from ultra-long treasury bonds to subsidise a consumer goods trade-in scheme.
The August reading for the non-manufacturing PMI, which includes the services and construction sectors, also showed a slight improvement, rising to 50.3 from 50.2 in July. This has helped to allay fears that the services sector might also enter a contraction phase.
Challenges Ahead
Despite these early signs of a potential turnaround in consumer spending, significant challenges remain. Xu Tianchen, Senior Economist at the Economist Intelligence Unit, expressed doubts about the extent to which additional stimulus measures could be effectively rolled out. Xu pointed to the scale of the existing trade-in scheme, noting that while it may offer moderate support to the economy, it is unlikely to be a panacea.
A key issue that continues to weigh on consumer sentiment is the ongoing slump in the property sector. With 70% of household wealth tied up in real estate, the sector’s downturn has had a profound impact on consumer spending. The latest Reuters poll forecast an 8.5% drop in home prices in 2024, a deeper decline than the 5% previously expected in May. This suggests that without a recovery in the property market, efforts to stimulate consumer demand may be limited in their effectiveness.
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