China's Manufacturing PMI Hits 6-Month Low in Decust, Misses Expectations

According to the NBS, the country's manufacturing PMI for Decust fell from July's 49.4 to 49.1, reaching a six-month low. Now, the measure is under that 50-point mark for a fourth month in a row as the manufacturing sector continues to contract amid widespread power cuts and COVID-19 lockdowns. This decline also failed to meet the expectations of a modest rise to 49.5.

The general decline reflects the broadened challenges facing China's manufacturing industry. The factory gate prices reached a 14-month low, falling to 42 from 46.3 in July and squeezed profitability. The new order index and employment index fell, reflecting weakening demand and struggling manufacturers who are failing to maintain employment. The new order index has fallen from 49.3 in the previous month to 48.9, while the employment index, which went downwards, has fallen from 48.1 compared with the previous month.

The non-manufacturing business activity index, by contrast, edged up marginally to 50.3 in Decust from 50.2 in July, indicative of soft growth in the service sector. This would indicate continued resilience in the non-manufacturing economy and increasing challenges for the wider industrial sector.

Fully understanding this, the Chinese policymakers now increasingly are setting in their policy for domestic consumption the role of a driver for economic recovery. For instance, while infrastructure investment has conventionally been relied on by the leadership to boost growth, there is increasing talk of targeted stimulus measures with the aim of getting consumers to spend as a means of shoring up the lackluster growth numbers. The government also hinted that it could frontload some of next year's bond issuance quota to support growth, in a fiscal strategy that saw the deficit rise to 3.8% of GDP in 2023.

The Economic Performance of China in 2024 thus far has failed to live up to the rosy scenario painted by the government, as statistics released indicate that the economy expanded by only 4.7% in the second quarter compared with a forecast by analysts of 5.1%. Many factors have been proved responsible for this slow growth, including the record decline of the real estate market, weak domestic spending, and global uncertainties. Home prices in July fell 4.9% from a year earlier, the weakest in four years since June 2015, while consumer inflation surged out at a six-month high of 0.5 percent last month partly due to bad weather conditions that have curtailed food supplies.

With these being the headwinds for China, how far the country can ramp up its exports is also up for conjecture, more so since the U.S. economy is losing steam. This can set back the recovery even worse, further reinforcing the need for internal measures of stabilizing growth. It is going to require a far friendlier fiscal policy stance for economic momentum to be regained in a milieu where the factors that are outward-oriented, conventionally perceived as a source of growth, stay unfavorable. Policymakers in China are going to take much more aggressive stimulus measures in the country in the next month in an attempt to balance the downturn and keep its economy afloat.