In November, China’s manufacturing sector experienced its second consecutive contraction, and the decline was even more pronounced. This indicates a growing need for additional stimulus to boost economic growth and reassure confidence in the government’s ability to effectively support the industry.
Although economists had raised their expectations for China’s economy following a positive third-quarter performance, the manufacturing sector continues to face challenges. Despite various supportive measures from policymakers, factory managers seem to be grappling with persistent negative sentiment due to sluggish demand both domestically and internationally.
In November, the official Purchasing Managers’ Index (PMI) dropped to 49.4, down from October’s 49.5, according to data from the National Bureau of Statistics. This missed the expected forecast of 49.7. The 50-point threshold distinguishes between contraction and expansion in the economy.
Dan Wang, chief economist at Hang Seng Bank China, commented on the situation, saying, “The domestic market can’t make up for losses in Europe and the United States. The data indicates that factories are producing less and hiring fewer people.” She expressed concern that the data might reflect a loss of confidence in government policies, emphasizing that factory activity might not improve soon as other economic issues take precedence. “The priority now is clearly containing the local government debt risk and the risk posed by regional banks.”
The sub-index for new orders contracted for a second consecutive month, and the component for new export orders continued its decline for the ninth consecutive month.
In another concerning development, the expansive services sector experienced a contraction for the first time in a year. The non-manufacturing Purchasing Managers’ Index (PMI), which encompasses services and construction, decreased to 50.2 in November, down from last month’s 50.6.
China’s economy has faced challenges in achieving a robust recovery after the pandemic, hindered by issues in the property market, local government debt risks, sluggish global growth, and geopolitical tensions.
The factory Purchasing Managers’ Index (PMI) has been in contraction for seven of the past eight months, only crossing the 50-point mark in September. The last time the indicator stayed negative for more than three consecutive months was in the six months leading up to October 2019.
Sheana Yue, China economist at Capital Economics, noted, “The hard data have held up better than the survey-based measures lately, which may be overstating the extent of the slowdown due to sentiment effects. But if that starts to change, policy support will need to be ramped up further to prevent the economy from backsliding.”
The uneven recovery has led analysts to caution that China might face a slowdown similar to Japan’s stagnation in the coming years unless policymakers shift the focus towards household consumption and a market-oriented allocation of resources.
Zhou Hao, an economist at Guotai Junan International, commented, “Today’s PMI reading will further raise expectations towards policy support. Fiscal policy will be under the spotlight and take center stage over the coming year and will be closely monitored by the market.”
In early Asia, oil prices dropped due to China, the world’s largest energy consumer, experiencing weaker-than-expected manufacturing activity. The offshore yuan also slipped as a result.
Additional support is required
On Tuesday, China’s central bank governor expressed confidence in the country’s prospects, foreseeing healthy and sustainable growth in 2024 and beyond. However, he emphasized the need for structural reforms to reduce dependence on infrastructure and property for economic expansion.
Policy advisers suggest that if the government aims to maintain an annual economic growth target of “around 5%” next year, similar to this year’s goal, additional stimulus measures may be necessary.
Despite the potential need for further monetary stimulus, the People’s Bank of China (PBOC) faces constraints due to concerns about widening interest rate differentials with the West, which could weaken the currency and trigger capital outflows.
In October, China introduced a plan to issue 1 trillion yuan ($138.7 billion) in sovereign bonds by year-end, adjusting the 2023 budget deficit target to 3.8% of GDP from the original 3%.
The People’s Bank of China (PBOC) has recently implemented small interest rate cuts and infused more money into the economy, affirming its commitment to providing ongoing policy support.
While China continues to allocate more funds to infrastructure projects to stimulate growth, resulting in a likely rise in the construction index from 53.5 in October to 55.0, the government is actively working to reduce the economy’s reliance on the property sector.
Ting Lu, Chief China Economist at Nomura, cautioned against premature optimism despite the various stimulus measures. In a note, he stated, “Despite the raft of stimulus measures announced over the past several months, we believe it is still too early to call the bottom. We expect another economic dip towards end-2023 and spring 2024.”
