China’s factory activity likely expanded modestly for a second consecutive month in November, suggesting that the government’s recent stimulus measures are beginning to take effect. The anticipated uptick offers a glimmer of hope for producers in the world’s second-largest economy, which has faced months of subdued performance.
A 21 economists forecasts the official Purchasing Managers’ Index (PMI) to register at 50.2 when the data is released on Saturday. This reading, marginally higher than October’s 50.1, indicates slight growth in activity, staying above the 50-point threshold that separates expansion from contraction.
China’s Manufacturing Sector
China’s manufacturing sector has been under immense pressure this year, burdened by falling producer prices, weak domestic demand, and dwindling export orders. However, recent data, including October’s PMI and expectations for November, hints at improving sentiment among manufacturers.
Last month, exports surged, driven by factories expediting shipments to key markets in anticipation of additional tariffs from the United States and the European Union. This, coupled with targeted government interventions, has sparked cautious optimism.
Yet challenges remain. The mood in the manufacturing sector remains fragile, and industrial profits have continued to decline, underscoring the difficulties faced by firms striving to maintain profitability amid global economic uncertainties.
Driven Rebound
Beijing has introduced a series of measures aimed at bolstering the economy. In September, the central bank rolled out its largest stimulus package since the pandemic, while earlier this month, the government announced a 10 trillion yuan ($1.38 trillion) debt package designed to ease financing pressures on municipalities.
These steps aim to pull the economy closer to the government’s 2023 growth target of approximately 5%. Analysts suggest the recent measures are beginning to yield results:
- Retail sales posted their strongest growth since February last month, reflecting improved consumer sentiment.
- A slump in property sales, which has weighed heavily on domestic demand, showed signs of narrowing, hinting at a potential stabilization of the troubled real estate sector.
Despite these positive indicators, the road to recovery remains steep. Industrial output growth slowed slightly in October, and profits continued to decline, highlighting the uphill battle for manufacturers.
Property Market and Domestic Demand
China’s property market—a crucial pillar of the economy—has been a focal point of policymakers’ efforts to revitalize domestic demand. While recent interventions appear to have eased some pressures, analysts caution that more comprehensive measures may be required to achieve a sustained recovery.
Property sales, long considered a barometer of economic health in China, showed tentative signs of improvement in October. However, the sector continues to face headwinds, including high levels of developer debt and cautious consumer sentiment.
China’s economy faces additional challenges on the international front, particularly with the impending inauguration of U.S. President-elect Donald Trump, who has vowed to implement tough trade policies targeting Beijing.
On Monday, Trump announced plans to impose a 10% tariff on Chinese goods in response to Beijing’s handling of chemicals used in fentanyl production. During his campaign, Trump also floated the idea of tariffs exceeding 60% on Chinese goods, which could significantly impact China’s position as the world’s leading exporter.
These proposed tariffs come at a precarious time for China’s economy. While the nation has sought to diversify its trade partners, the U.S. remains a crucial market. Any escalation in trade tensions could further strain China’s growth trajectory.
The official PMI forecast of 50.2 reflects modest optimism, but opinions among analysts remain mixed.
- Bank of China and Nomura provided the highest PMI projections at 50.6, suggesting a stronger rebound in activity.
- Conversely, the Economist Intelligence Unit anticipates a contraction, forecasting a PMI reading of 49.9.
The private Caixin manufacturing PMI, which focuses on smaller, private firms, is scheduled for release on Monday. Analysts expect it to rise slightly to 50.5, consistent with the improving sentiment observed in the official survey.
2024 and Beyond
As 2023 draws to a close, Chinese policymakers are under pressure to sustain the nascent recovery. With the economy still grappling with structural challenges, including a weakened property market and slowing global demand, experts recommend maintaining a growth target of around 5% for 2024 and introducing additional measures to bolster domestic consumption.
Some key recommendations from policy advisers include:
- Enhanced fiscal support: Expanding government spending to support infrastructure projects and stimulate demand.
- Monetary easing: Continuing to lower interest rates to reduce borrowing costs for businesses and consumers.
- Property market reforms: Implementing policies to address the long-term challenges of the real estate sector while supporting short-term stabilization.
Economic Indicators
Several indicators in the coming months will provide further insight into the trajectory of China’s economy:
- Retail sales and consumer spending: Sustained growth in these areas will be crucial to offset weaknesses in other sectors.
- Industrial output and profitability: While the recent slowdown in industrial output growth is a concern, a stabilization in profits would indicate healthier business conditions.
- Trade data: Export performance in the face of potential U.S. and EU tariffs will be a key determinant of economic resilience.
