China’s manufacturing sector sank to its lowest point in six months this August, as factory gate prices plummeted and manufacturers struggled to secure new orders, according to an official survey released on Saturday. The continued decline in manufacturing activity is increasing pressure on Chinese policymakers to shift their focus from traditional infrastructure investments to direct stimulus aimed at boosting household consumption.

The National Bureau of Statistics reported that the purchasing managers’ index (PMI) fell to 49.1 in August, down from 49.4 in July. This marks the sixth consecutive decline and the fourth month the index has remained below the 50-point threshold that separates expansion from contraction. The figure also missed the median forecast of 49.5 from a Reuters poll, highlighting the persistent challenges facing China’s economy.

As the world’s second-largest economy lost momentum in the second quarter, policymakers began signaling a readiness to depart from their usual approach of heavy infrastructure spending. Instead, they are increasingly considering more targeted stimulus measures to boost household spending, which has been sluggish due to a prolonged property crisis and weakening domestic demand.

Factory gate prices dropped to their lowest level in 14 months, with the price sub-index falling to 42 from 46.3 in July. Both new orders and new export orders remained in negative territory, and manufacturers continued to halt hiring amid the downturn.

Zhiwei Zhang, chief economist at Pinpoint Asset Management, noted the restrictive fiscal policy may be contributing to the weak economic momentum. He emphasized the need for a more supportive fiscal stance to achieve economic stabilization, particularly as the U.S. economy slows and China’s exports become less reliable.

In response to the ongoing economic challenges, policy advisers are reportedly considering whether Beijing should advance a portion of next year’s bond issuance quota if growth fails to stabilize. Last year, China made a similar move by frontloading part of the 2024 local government debt quotas to invest in infrastructure, raising the deficit to 3.8% of GDP from 3.0%.

However, analysts now expect that the authorities will focus more on bolstering domestic demand, which has been a weak spot in China’s economic recovery. Retail sales exceeded expectations last month, suggesting that the government’s recent decision to allocate around 150 billion yuan ($21 billion) towards a trade-in scheme for consumer goods may be paying off. The August reading of the non-manufacturing PMI, which includes services and construction, also improved slightly to 50.3, easing fears of a broader economic contraction.

Despite these positive signs, economists remain cautious. Xu Tianchen, a senior economist at the Economist Intelligence Unit, expressed skepticism about the effectiveness of additional stimulus, noting that while the trade-in scheme may provide moderate support, it is unlikely to be a game-changer for the economy. Xu also highlighted the ongoing slump in the property sector, which has had a significant impact on consumer spending, given that 70% of household wealth is tied to real estate.

With home prices expected to fall by 8.5% in 2024, according to a Reuters poll, the outlook for China’s economy remains uncertain. Xu suggested that officials may lower their growth expectations, potentially settling for something below the 5% annual growth target set by Beijing. As China navigates these economic headwinds, the effectiveness of its policy response will be crucial in determining its path forward.

(Adapted from Reuters.com)

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