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A worker assembles a corn combine harvester at a factory in Qingzhou Economic Development Zone, Shandong Province, August 31, 2024.
Cfoto | Future Publishing | Getty Images
China’s manufacturing activity tumbled to its lowest level in six months in August as factory-gate prices plunged and owners struggled to secure orders, an official survey showed on Saturday, forcing policymakers to press ahead with plans to provide more stimulus to households.
The National Bureau of Statistics Purchasing Managers’ Index fell to 49.1 from 49.4 in July, marking the sixth consecutive month of decline and the fourth consecutive month of falling below the 50 boom-bust dividing line. The index was lower than the median forecast of 49.5 in a Reuters poll.
China’s growth in the world’s second-largest economy weakened further in July after a dismal second quarter, prompting policymakers to signal they were ready to abandon their strategy of pumping money into infrastructure projects and instead target new stimulus at households.
Sentiment among manufacturers remains subdued as domestic demand is sluggish due to a years-long real estate crisis and Western countries impose restrictions on Chinese exports such as electric vehicles.
Producers reported that factory-gate prices were at their lowest level in 14 months, plunging to 42 from 46.3 in July, while the new orders and new export orders sub-indexes remained in negative territory as manufacturers remained on hold on hiring.
“The fiscal policy stance is still quite tight, which could be one of the reasons for the weak economic growth momentum,” said Zhang Zhiwei, chief economist at Precision Asset Management.
“To achieve economic stabilization, the fiscal policy stance needs to become more supportive. With the U.S. economy slowing, exports may no longer be the reliable source of growth they were in the first half of the year,” he added.
Policy advisers are considering whether Beijing will decide in October to bring forward some of next year’s bond issuance quota if economic growth shows no signs of bottoming out over the summer.
China took similar steps last year, implementing a stimulus package that raised its deficit to 3.8% of GDP from 3.0% and brought forward part of its 2024 local government debt quota to invest in flood control and other infrastructure.
However, analysts expect that this time around the authorities will seek to curb domestic demand.
Early encouraging signs
Last month, retail sales of consumer goods beat expectations, apparently vindicating a decision made by officials in July that China will raise about 150 billion yuan ($21 billion) this year from issuing super-long government bonds to subsidize a consumer goods trade-in program.
The non-manufacturing PMI, which includes services and construction, rose to 50.3 in August from 50.2, easing concerns that the sector would also enter a period of contraction.
Still, beyond a pledge from the Communist Party’s top decision-making body, economists are waiting for more concrete plans to revive China’s market of 1.4 billion consumers.
It’s not easy.
Xu Tianchen, a senior economist at the Economist Intelligence Unit, said that given the size of the trade-in program, “I’m actually not sure whether more (stimulus measures) can be introduced.” He said the program “will provide modest support to the economy” and “seems to be welcomed by consumers.”
More importantly, any efforts to revive domestic demand are likely to be ineffective without further steps to mitigate the severe slump in the real estate sector, which has been a significant drag 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 have been tightening their purse strings.
A Reuters poll on Friday forecast house prices would fall 8.5% in 2024, a bigger drop than the 5.0% forecast in a May poll.
“I think this year the authorities will accept a growth target of less than 5%,” said Xu Li of the Economist Intelligence Unit, referring to Beijing’s annual growth target.
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