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China’s Factory Activity Expands for Second Month Amid Stimulus and Trade Uncertainty

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China’s manufacturing sector showed modest growth for the second consecutive month in November, with the official purchasing managers’ index (PMI) rising to 50.3, a seven-month high, up from October’s 50.1. This figure, released by the National Bureau of Statistics, exceeded expectations of 50.2 from a Reuters poll, signaling a recovery in the world’s second-largest economy. A reading above 50 indicates expansion, while below that signals contraction.

This improvement follows months of a sluggish manufacturing environment, where tumbling producer prices and declining orders weighed heavily on factory output. Two consecutive months of expansion suggest that Beijing’s recent stimulus measures are beginning to boost confidence across factory floors. However, potential trade tensions with the U.S., led by President-elect Donald Trump, cast uncertainty over the outlook for 2024.

Trump recently announced plans to impose a 10% tariff on Chinese goods, aiming to pressure Beijing to curb the production of chemicals used in fentanyl manufacturing. During his campaign, he also hinted at even steeper tariffs of up to 60%, presenting significant risks for China’s export-dependent industrial sector.

In October, Chinese exports surged unexpectedly, a rise attributed to factories accelerating shipments in anticipation of further U.S. and EU tariffs. Analysts fear that such preemptive gains may not translate into long-term stability.

Stimulus Boost but Demand Remains Insufficient
Economists point to fiscal and monetary policy adjustments since the Politburo meeting in late September as contributing to the improved PMI figures. Zhang Zhiwei, president of Pinpoint Asset Management, noted that these measures have provided temporary stabilization but cautioned that the 2025 outlook remains unclear.

“The looming trade war will delay corporate investment decisions, and while fiscal stimulus is expected, its scale and focus remain uncertain,” Zhang said. A key policy meeting in December may provide more clarity on China’s economic strategies for 2024.

The November PMI data revealed a mixed picture: total new orders grew for the first time in seven months, but export orders contracted for the seventh consecutive month. Zhang Liqun, an analyst at the China Logistics Information Center, highlighted that insufficient demand continues to constrain production. He emphasized the need for stronger government-driven public investments to stimulate enterprise orders.

Non-manufacturing PMI, which encompasses construction and services, dropped to 50.0 in November from 50.2 in October. While services sector activity showed modest growth for the second month, the overall trend underscores lingering weaknesses in the broader economy.

Government Stimulus and Signs of Recovery
China has introduced substantial stimulus packages to support its economy. A 10 trillion yuan ($1.38 trillion) debt program was unveiled earlier in November to address municipal financing challenges. The central bank’s September intervention, marking its largest since the pandemic, was aimed at steering the economy toward the government’s growth target of around 5%.

Early signs of economic recovery are emerging. Retail sales posted their strongest growth since February, while property sector declines began to narrow. However, industrial output slowed slightly in October, and industrial profits continued to decline, reflecting persistent challenges for businesses.

China’s November composite PMI, which includes manufacturing and services activity, remained steady at 50.8, further hinting at stabilization. Analysts await the private-sector Caixin factory survey, set to be released Monday, which is expected to edge up to 50.5.

Despite these signs of improvement, economic vulnerabilities persist. Policymakers are reportedly considering maintaining the 5% growth target for 2024 and implementing additional measures to bolster domestic demand.

 

ECB’s Panetta Advocates Lower Rates and Clearer Forward Guidance

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Call for a Return to Forward-Looking Policy

Fabio Panetta, a member of the European Central Bank’s (ECB) Governing Council and Governor of the Bank of Italy, has emphasized the need for a forward-looking monetary policy framework as inflation in the eurozone stabilizes. Speaking at Milan’s Bocconi University, Panetta highlighted the importance of shifting focus from restrictive measures to supporting the real economy, which remains sluggish.

“With inflation close to target and domestic demand stagnant, restrictive monetary conditions are no longer necessary,” Panetta stated, warning that failing to stimulate the economy could risk inflation falling well below the ECB’s 2% target.

Recent Monetary Policy Moves

The ECB has already taken steps to ease monetary conditions, cutting interest rates three times since June as inflation cooled from double-digit levels experienced after Russia’s invasion of Ukraine in 2022. The latest cut in October brought the deposit rate down to 3.25%.

Panetta suggested further reductions are necessary to reach a neutral rate, which economists estimate at 2-2.5% for the euro area. Some projections place this rate as low as 1.75% or as high as 3%. Investors expect another 25 basis point cut in December, potentially bringing the deposit rate to between 1.75% and 2.0%.

“We are probably still a long way from the neutral rate,” Panetta remarked, indicating the ECB’s work is far from over in normalizing monetary policy to support growth.

Transition from Exceptional Policy Framework

In response to the economic shocks of 2022-2023, the ECB adopted a “meeting-by-meeting” approach, eschewing traditional forward guidance to adapt to volatile conditions. Panetta argued that with economic conditions becoming more predictable, the ECB should return to a medium-term, forward-looking strategy.

He criticized the current framework, saying, “Meeting-by-meeting, data-driven policy does not fit well with the more forward-looking approach that we need to adopt.” Instead, he advocated for clear guidance on the evolution of policy rates to help businesses and households plan effectively.

Providing such guidance, he noted, would bolster demand and aid in the recovery of the eurozone’s real economy.

Outlook and Implications

As inflation normalizes, the ECB faces the challenge of balancing rate cuts to stimulate demand without reigniting price pressures. Panetta’s call for a more transparent and forward-looking approach could signal a shift in how the ECB communicates and implements its policies.

With another rate cut expected in December and further reductions anticipated through the spring, the ECB appears poised to adopt a less restrictive stance. Panetta’s remarks suggest that this period could also mark a broader strategic shift aimed at supporting long-term economic stability and growth.

Beijing Promises Market Reforms and Support for Hong Kong Amid Global Uncertainty

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Commitments to Open Markets and Boost Hong Kong

During the Global Financial Leaders’ Investment Summit in Hong Kong, Beijing pledged to continue opening its financial sector to foreign investors while supporting Hong Kong’s role as a global financial hub. The summit, attended by top Wall Street executives, underscored China’s commitment to market reforms amidst geopolitical tensions and domestic economic challenges.

“We will create an inclusive and favorable business environment for foreign investors,” stated Zhu Hexin, deputy governor of China’s central bank. He emphasized China’s willingness to welcome overseas investments as part of its economic development strategy.

Wu Qing, Chairman of the China Securities Regulatory Commission, promised to reduce investment barriers, implement supportive measures, and deepen capital market reforms. Vice Premier He Lifeng also announced plans to increase Hong Kong’s global financial standing, including facilitating Chinese enterprises’ access to Hong Kong’s bond and equity markets.

Geopolitical and Economic Context

The summit occurred amidst increasing scrutiny of Hong Kong’s autonomy following the implementation of a national security law in 2020. Western governments have criticized the legislation, citing its impact on democratic freedoms, while Beijing maintains it was necessary for restoring order after 2019’s mass protests.

The timing of Beijing’s announcements coincided with Hong Kong’s High Court sentencing 45 pro-democracy activists in a landmark trial, which has drawn sharp criticism from the U.S. and other nations.

Challenges in Global and Domestic Markets

Hong Kong has experienced a decline in initial public offerings (IPOs), with only $9.1 billion worth of listings in 2024 compared to a peak of $51.6 billion in 2020. This downturn has led financial firms to cut jobs in the region. Despite this, international executives such as Citigroup’s Jane Fraser and Goldman Sachs’ David Solomon expressed optimism about potential deregulation in the U.S. fueling global corporate activity.

China’s domestic economy remains sluggish due to ongoing issues in the property sector and the lingering effects of pandemic-related disruptions. To combat this, Beijing recently introduced a 10 trillion yuan ($1.38 trillion) debt package aimed at stabilizing local government finances and boosting growth.

Morgan Stanley CEO Ted Pick highlighted early signs of recovery, stating, “Battling deflation takes time. The monetary and fiscal measures are starting to take effect, but results will not be immediate.”

However, concerns linger among global investors regarding capital mobility in China. Solomon remarked, “Messages about the ability to attract capital and ensure it can flow in and out of the country are crucial for global confidence.”

Hong Kong’s Strategic Role and Future Outlook

Beijing reaffirmed its support for Hong Kong by committing to bolster its financial market through regular issuance of treasury bonds and facilitating the expansion of Chinese financial institutions. Despite challenges, the summit underscored Hong Kong’s strategic importance to China’s broader economic ambitions.

As global financial leaders evaluate opportunities, the interplay between Beijing’s reforms, Hong Kong’s recovery, and the broader geopolitical environment will remain pivotal for shaping the region’s economic trajectory.