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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.

 

China’s Industrial Profits Plunge in August, Deepening Economic Woes

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China’s industrial profits faced their steepest decline this year, contracting sharply by 17.8% in August after a brief recovery of 4.1% in July, according to the National Bureau of Statistics (NBS). This marks the biggest monthly slump in 2023, reflecting mounting economic pressures as business activity continues to slow. For the first eight months of the year, earnings grew by a mere 0.5%, compared to the 3.6% growth seen in the January-July period.

The NBS attributed the downturn to several factors, including weak market demand, the adverse effects of natural disasters like high temperatures, heavy rainfall, and floods, and a high statistical base from last year. Particularly impacted were the automobile and equipment manufacturing industries, contributing to the sharp contraction in profits.

According to Zhou Maohua, a macroeconomic researcher at China Everbright Bank, this slump underscores a growing imbalance in China’s economic recovery, exacerbated by weak domestic demand. The sluggish industrial performance is compounded by broader economic concerns, including uncertainty over job security, a faltering property market, and declining investment.

Earlier data in September highlighted weak consumer demand, which remains a significant bottleneck for the economy. Inner Mongolia Yili Industrial Group Co, a leading domestic dairy company, reported a 40% drop in net profit for the second quarter, underscoring the challenges businesses face in an increasingly cautious market environment. NBS spokesperson Wei Ning echoed these concerns, citing the complexity and volatility of external factors further clouding the economic outlook.

In an effort to revive the economy, China’s central bank introduced the most aggressive stimulus package since the pandemic, including a 50 basis point reduction in banks’ reserve requirements. However, analysts warn that more extensive fiscal support will be necessary to restore confidence and stimulate demand.

Chinese leaders responded with a pledge of “necessary fiscal spending” to meet the country’s growth target of 5% for 2024, which analysts have downgraded below the official forecast. A major component of this fiscal stimulus includes the issuance of $284 billion in sovereign debt, some of which will be used to provide a monthly allowance of $114 per child to families with two or more children, in a bid to boost household spending.

Despite these efforts, industrial sectors remain strained. State-owned firms saw profits decline by 1.3% from January to August, while foreign-owned enterprises recorded a modest 6.9% rise. Private companies fared slightly better, posting a 2.6% increase over the same period.

The NBS data tracks companies with annual revenues of at least 20 million yuan ($2.83 million) from their main operations, signaling that even larger firms are not immune to the broader economic challenges gripping China.

China Unveils Broad Stimulus Measures to Revive Economy

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China’s central bank announced wide-ranging monetary stimulus and property market measures on Tuesday, aiming to revive an economy facing deflationary pressures and at risk of missing its growth target for the year. The People’s Bank of China (PBOC) revealed plans to lower borrowing costs, increase liquidity, and ease the burden of mortgage repayments for households, marking the latest attempt to restore confidence in the world’s second-largest economy after months of disappointing economic data.

Stocks and bonds in China rallied as Governor Pan Gongsheng outlined the measures, which include cutting banks’ reserve requirement ratios (RRR) by 50 basis points (bps). This move will free up around 1 trillion yuan ($141.93 billion) for new lending, though credit demand remains weak. The PBOC will also lower the seven-day repo rate by 0.2 percentage points to 1.5%, and reduce the medium-term lending facility rate by 30 basis points. Loan prime rates will also see a 20-25 bps cut.

The property market, a major driver of China’s economy, received further support with a 50 bps reduction in average interest rates for existing mortgages and a reduction in the minimum down payment to 15% for all types of homes. China’s property market has been in decline since its peak in 2021, and the crisis has heavily impacted consumer confidence, with 70% of household savings tied to real estate.

Despite earlier efforts to lower mortgage rates and downpayment requirements, demand for homes remains weak, and prices continue to fall. August’s economic data missed expectations, adding urgency to the stimulus package. Analysts warn, however, that these measures may not be sufficient to fully restore growth unless complemented by stronger fiscal policies.

Local governments have accelerated bond issuance to fund infrastructure projects, and analysts expect further support measures in the coming weeks as China aims to meet its roughly 5% growth target for the year. The recent U.S. Federal Reserve rate cut has provided room for the PBOC to ease its own monetary policies without putting too much pressure on the yuan.

Analysts, including those from investment banks such as Goldman Sachs and UBS, have already downgraded their growth forecasts for 2024, but they see Tuesday’s measures as a positive step towards economic recovery. ING’s Chief Economist for Greater China, Lynn Song, believes there is potential for further easing in the coming months, especially if global central banks continue cutting rates.