November saw a faster-than-expected decline in China’s manufacturing activity, indicating that further stimulus will be required to support economic growth and rebuild public trust in the government’s ability to assist business.

After better-than-expected third-quarter data, economists raised their projections for the second-largest economy in the world. However, in spite of a flurry of policy assistance measures, factory managers’ pessimism seems to have solidified in the face of sluggish demand both domestically and internationally.

According to statistics released on Thursday by the National Bureau of Statistics, the official purchasing managers’ index (PMI) decreased from 49.5 in October to 49.4 in November, falling short of the 49.7 predicted by economists. The boundary between contraction and expansion is the 50-point mark.

“The domestic market cannot make up for losses in Europe and the United States. The data shows that factories are producing less and hiring fewer people,” said Dan Wang, chief economist at Hang Seng Bank China.

“(The data) could also show a loss of confidence in government policy,” she added, warning factory activity was unlikely to improve anytime soon as other economic problems dominate. “The priority now is clearly containing the local government debt risk and the risk posed by regional banks.”

While the new export orders component continued to decline for a ninth month, the new orders sub-index shrank for a second month in a row.

The enormous services sector shrank for the first time in a year, which is another concerning indicator. The PMI for non-manufacturing, which covers construction and services, decreased to 50.2 in November from 50.6 the previous month.

China’s economy has found it difficult to mount a robust post-pandemic rebound this year due to a number of factors, including poor global growth, geopolitical tensions, dangers associated with local government debt, and an intensifying real estate market problem.

For seven of the last eight months, the factory PMI has decreased; it has just risen beyond the 50-point threshold in September.

The six months leading up to October 2019 were the last time the indicator was negative for more than three months in a row.

“The hard data have held up better than the survey-based measures lately… (which) may be overstating the extent of slowdown due to sentiment effects,” Sheana Yue, China economist at Capital Economics, said in a note.

“But if that starts to change, policy support will need to be ramped up further to prevent the economy from backsliding.”

Because of the uneven recovery, many observers have cautioned that unless officials take action to reorient the economy towards domestic consumption and market-allocation of resources, China may descend into stagnation akin to that of Japan later this decade.

“Today’s PMI reading will further raise expectations towards policy support,” said Zhou Hao, economist at Guotai Junan International. “Fiscal policy will be under the spotlight and take centre stage over the coming year and will be closely monitored by the market.”

Early Asia saw a decline in oil prices as a result of lower-than-expected manufacturing activity in China, the country that uses the most energy globally. The offshore yuan also declined.

The governor of China’s central bank stated on Tuesday that he was “confident that China will enjoy healthy and sustainable growth in 2024 and beyond,” but he also demanded structural changes to lessen the country’s reliance on real estate and infrastructure.

According to policy advisers, sustaining an annual economic growth target of “around 5%” next year—which would equal this year’s objective—will need the government to undertake further stimulus.

However, the People’s Bank of China (PBOC) is unable to carry out additional monetary stimulus due to worries that the currency may weaken and capital flight may be sparked by a growing interest rate gap with the West.

China announced in October that it would issue 1 trillion yuan ($138.7 billion) in sovereign bonds by the end of the year, increasing the budget deficit target for 2023 from 3% of GDP to 3.8% of GDP.

In recent months, the PBOC has also modestly lowered interest rates and increased money injections into the economy while maintaining policy support.

Although the government has been working to lessen the economy’s reliance on real estate, China continues to direct more funding towards infrastructure projects in an effort to spur growth, which probably helped the construction index rise to 55.0 from 53.5 in October.

“Despite the raft of stimulus measures announced over the past several months, we believe it is still too early to call the bottom,” Ting Lu, chief China economist at Nomura, said in a note. “We expect another economic dip towards end-2023 and spring 2024.”

(Adapted from Asahi.com)

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