China’s factory activity growth in December has fallen short of analysts’ expectations, signaling that the government’s stimulus measures may not have been sufficient to provide a meaningful boost to the country’s struggling economy. According to data released by the National Bureau of Statistics, China’s official Purchasing Managers’ Index (PMI) for December came in at 50.1, slightly below Reuters’ forecast of 50.3. The PMI readings for November and October were 50.3 and 50.1, respectively. A PMI reading above 50 indicates an expansion in activity, while a figure below that suggests contraction.
Despite the overall PMI falling just above the threshold for expansion, the data reveals a mixed performance across various sectors. The National Bureau of Statistics reported that production and new orders in certain sectors, such as agricultural processing, food processing, general equipment, and beverages, showed signs of growth. However, this growth has not been enough to generate a significant positive shift in the overall economic outlook.
In contrast, China’s non-manufacturing PMI, which measures activity in the services and construction sectors, saw a more notable improvement. It rose to 52.2 in December, compared to 50.0 in November, signaling a recovery in services and construction. Out of the 21 industries surveyed, 17 recorded higher activity levels than the previous month, including key sectors like aviation, transportation, and telecommunications. The construction industry also returned to expansion, driven by the approaching Spring Festival holidays, which typically result in increased demand in this sector.
Despite these positive signs in certain industries, analysts remain cautious about the overall health of China’s economy. Tommy Xie, head of Asia macro research at OCBC, suggested that the previous month’s significant swing in the non-manufacturing PMI was partially due to a sharp decline in the construction PMI. This highlights the uneven nature of China’s economic recovery, with some sectors struggling while others show signs of growth.
The manufacturing sector is expected to remain a key area of concern, with investors awaiting the release of the Caixin/S&P Global manufacturing PMI on Thursday for further insights. The 2024 outlook for the Chinese economy has been described by Larry Hu, chief China economist at Macquarie Group, as a year of “muddle-through.” He indicated that deflationary pressures remain a significant challenge, as policy stimulus has only been sufficient to meet GDP growth targets but not enough to significantly reinflate the economy.
China’s economy has shown some signs of recovery since the introduction of several stimulus measures in late September. However, the recovery has been modest, with growth expected to be around 4.9% for 2024, slightly above the 4.8% previously forecasted by the World Bank. Despite this, other recent economic data paints a grim picture, with deflationary pressures continuing to build. November saw China’s consumer inflation fall to its lowest level in five months, and both exports and imports underperformed expectations. Retail sales also disappointed, failing to meet Reuters’ forecasts.
Furthermore, China’s industrial profits continued their downward trajectory, falling 7.3% year-on-year in November, marking the fourth consecutive month of declines. The government has responded with fiscal measures aimed at stimulating consumption and economic growth, including an expansion of consumer goods trade-ins, increased pensions, and higher medical insurance subsidies for residents. Additionally, China plans to issue a record 3 trillion yuan ($411 billion) in special treasury bonds next year to further boost fiscal stimulus efforts.
While these measures may provide some relief, China faces significant challenges ahead, particularly in light of rising geopolitical tensions. The possibility of former U.S. President Donald Trump returning to the White House and threatening to impose higher tariffs on Chinese goods could exacerbate challenges for China’s export sector, which is already grappling with increased trade barriers from the European Union.
The road to economic recovery in China remains uncertain, with mixed signals from key sectors and continued deflationary pressures. The government’s ability to navigate these challenges and stimulate more robust growth will be closely watched as 2024 unfolds.
