China’s economic recovery remains fragile as the country enters 2025, with mixed signals emerging from its manufacturing and services sectors. Although recent policy stimulus measures are showing some positive effects, particularly in services and construction, the manufacturing sector continues to struggle. According to the National Bureau of Statistics (NBS), the official purchasing managers’ index (PMI) for manufacturing rose marginally to 50.1 in December from 50.3 the previous month, indicating very modest growth. Despite staying above the critical 50-mark separating growth from contraction, the reading fell short of the expected 50.3 in a Reuters poll, suggesting that China’s manufacturing activity barely grew.

This trend of sluggish manufacturing growth, despite recent policy stimulus, presents a critical challenge for China as it faces several economic headwinds. The country’s $18 trillion economy has yet to fully recover from the effects of the COVID-19 pandemic, with weak consumer demand, low investment levels, and a persistent property crisis. While the stimulus measures introduced by policymakers are aimed at revitalizing the economy, particularly the property sector, their success in generating a long-term recovery remains uncertain. Experts have warned that the recovery, particularly in the manufacturing sector, may be fragile unless these measures are sustained and expanded.

Mixed Manufacturing Performance and Policy Impact

While manufacturing activity in December showed signs of minor improvement, key indicators pointed to underlying weakness. The new orders sub-index of the manufacturing PMI rose to 51.0, its highest level in eight months, up from 50.8 in November. This suggests that businesses are receiving more orders, an encouraging sign of improved domestic demand. However, this positive development is tempered by ongoing challenges in export orders, employment, and factory gate prices, all of which remained in negative territory. The continued weakness in these areas reflects the broader issues within China’s manufacturing sector, such as overcapacity, underinvestment, and dependence on external demand, which is being impacted by global economic uncertainty.

One of the most pressing challenges for Chinese manufacturers is the global economic slowdown, which has been exacerbated by trade tensions, particularly with the United States. U.S. President-elect Donald Trump’s recent statements regarding the imposition of new tariffs on Chinese goods pose a significant risk to the manufacturing sector. Trump has proposed a 10% tariff on Chinese goods, with the aim of pressuring Beijing to address the trafficking of Chinese-made chemicals used in fentanyl production. Furthermore, during his campaign, Trump threatened to increase tariffs on Chinese goods to over 60%, which could severely disrupt China’s export-driven industries.

In light of these external risks, economists like Xu Tianchen, Senior Economist at the Economist Intelligence Unit, caution that the recovery in China’s manufacturing sector may be short-lived unless stimulus measures are maintained. While some analysts have observed that the worst period of overcapacity may be behind China, they warn that if stimulus efforts falter, activity could slow again, further dampening hopes of a sustained recovery.

The Role of Services and Construction in Recovery

In contrast to the stagnation in manufacturing, China’s non-manufacturing PMI showed more encouraging signs of recovery. The non-manufacturing PMI, which includes services and construction, rose to 52.2 in December, up from 50.0 in November. This uptick reflects the positive effects of policy stimulus in the services and construction sectors, which have benefited from increased demand and investment.

The growth in the services sector, particularly in financial services, telecommunications, and travel, is an important development for the Chinese economy. As the manufacturing sector faces challenges, services have become a more significant contributor to economic growth, offering a potential avenue for stability in the face of global uncertainties. The recovery in construction, fueled by increased government spending on infrastructure projects, is another key factor driving the overall economic performance.

However, despite these positive developments in services and construction, analysts warn that the recovery is still fragile. The World Bank recently raised its growth forecasts for China for 2024 and 2025 but cautioned that subdued household and business confidence, coupled with ongoing challenges in the property sector, would continue to weigh on the economy. The property sector, which once accounted for nearly a quarter of China’s GDP, remains a significant drag on overall growth. Government efforts to ease property restrictions and encourage consumer spending have yet to fully stabilize the market, and the debt overhang from distressed developers remains a significant challenge.

The Long Road Ahead: Sustaining Growth Amid External Risks

Looking ahead, China’s policymakers face a difficult balancing act. On one hand, they must continue to provide support to the manufacturing sector, which remains vulnerable to external shocks such as the U.S. tariff threat. On the other hand, they must ensure that the recovery in services and construction is sustainable and does not rely too heavily on government intervention.

Analysts at Nomura argue that it is still too early to tell whether the support measures, such as a consumer goods trade-in scheme and easing property purchase restrictions, will be sufficient to put the economy on a more sustainable growth path. While the surge in purchases of durable goods may offer a temporary boost, it is unclear whether this will be followed by a payback effect, which could dampen longer-term growth prospects.

As China enters 2025, the country will need to maintain its policy stimulus, focusing on consumer-driven growth, job creation, and the stabilization of the property market. The manufacturing sector will also need to adjust to a more challenging global environment, especially with the prospect of renewed trade tensions under a new U.S. administration. The risks are significant, but the direction of the economy will depend largely on the effectiveness of these policies and the resilience of the services and construction sectors.

While China’s economic recovery in December 2024 showed some signs of improvement, the country faces several challenges in the year ahead. The manufacturing sector’s continued struggles, coupled with external risks such as U.S. tariffs, underscore the need for sustained policy support. At the same time, the growth in services and construction provides a glimmer of hope for the economy, suggesting that China’s path to recovery may lie in diversifying its growth sources and focusing on long-term structural reforms.

(Adapted from Investing.com)

Categories: Economy & Finance, Regulations & Legal, Strategy