China’s Weak Factory Activity Shows Urgency of New Stimulus Push
(Bloomberg) — China’s factory activity continued to contract while the services sector slowed in September, as policymakers prepared an emergency stimulus blitz to revive an economy facing challenges across the board.
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The official manufacturing purchasing managers’ index was 49.8, meaning the sector has now been in contraction since April 2023, bar three months. The non-manufacturing PMI showed construction and services activity lost momentum, after growing last month.
The data shows the economy remained in a slump before Chinese officials announced a broad package of measures aimed at reviving growth. The central bank last week cut key interest rates and freed up cash for banks to boost lending, while the elite Politburo pledged to support fiscal spending and stabilize the beleaguered property sector.
Traders shrugged off the latest dismal data readings, as Beijing’s multi-pronged plan to lift sentiment in the world’s No. 2 economy continued to fuel a rally in stocks. The benchmark CSI 300 Index rose as much as 6.2% on Monday, the most since 2015, while a gauge of developers tracked by Bloomberg Intelligence surged by 11%.
“I don’t think September macro data points are going to matter this time for markets,” said Xin-Yao Ng, director of investment at abrdn Asia Ltd. “It’s all forward looking about what kind of fiscal stimulus comes out.”
What Bloomberg Economics Says…
“The weakness in China’s economy evident in the September PMI data shows why the government has swung into action to support growth… To sustain the boost to confidence, and kindle a genuine recovery, implementation of the measures, particularly on the fiscal front, will be crucial.”
— Chang Shu and Eric Zhu
Read the full note here.
The spotlight is now on what measures the Ministry of Finance might unleash, as officials from other arms of China’s economic universe implement measures to boost the property market and rate cuts. The 24-man Politburo led by President Xi Jinping vowed at a meeting last week to boost fiscal spending, although it offered no specifics.
Reuters reported the Ministry of Finance is planning to issue two trillion yuan ($284 billion) worth of special sovereign bonds this year, with half devoted to boosting consumption.
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If Beijing needed more reason to draw a line under its post-pandemic slowdown, the Caixin PMI survey in September showed the country’s manufacturing activity unexpectedly fell into contraction while services expansion weakened to the slowest in a year. That private gauge has typically painted a rosier picture of the economy.
“The PMIs suggest that the economy is still weak but there will be more focus on the impact of the strong stimulus measures announced over the past week,” said Woei Chen Ho, economist at the United Overseas Bank. “The monetary and fiscal policy mix should prevent the economy from further weakening in the near-term.”
The latest data offered a final snapshot of the economy before the nation of 1.4 billion people enters a weeklong National Day holiday. Spending over this period starting Tuesday will offer an early glimpse of the effects of Beijing’s efforts to boost consumer confidence, which clocked its weakest reading last month since November 2022.
“The lack of effective domestic demand is a serious problem, and the pressure on employment and weak expectations have constrained consumers’ ability and willingness to spend,” said Wang Zhe, senior economist of Caixin Intelligence Group.
While the Ministry of Finance has yet to make an official announcement, other monetary and economic authorities have begun to flesh out their part of the stimulus package over the last few days. The People’s Bank of China on Sunday said homeowners will be able to renegotiate terms with their current lenders, a move that would reduce their mortgage burdens and potentially boost household spending, starting Nov .1.
The National Development and Reform Commission, China’s economic planning agency, on Friday pledged full support to help private companies overcome difficulties during a Friday meeting with executives from firms such as Meituan and Youngor Fashion Co.
And at a State Council meeting on Sunday, Premier Li Qiang said government agencies will accelerate the pace of implementing policies as they strive to meet annual goals, state broadcaster CCTV reported. Beijing’s ability to reach its target of around 5% GDP growth was increasingly in doubt after data showed activity cooled across the board in August.
“The State Council responds to the Politburo who demands for increasing government investment,” said Raymond Yeung, ANZ chief greater China economist, who expects the Chinese economy to grow 4.9% this year. “The keyword here is ‘execution.’”
–With assistance from James Mayger, Tania Chen and April Ma.
(Updates with more comments, details throughout)
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