China’s manufacturing sector has faced yet another setback as activity contracted for the third consecutive month in December. The official purchasing managers’ index (PMI), which measures the health of the sector, fell to 49.0, indicating a contraction and undershooting the median forecast of 49.5. This unexpected decline raises concerns about China’s economic recovery and strengthens the case for the implementation of fresh stimulus measures in the new year.
The Chinese government has introduced a series of policies in recent months to support the post-pandemic recovery. However, the recovery has been hindered by a severe property slump, local government debt risks, and soft global demand. These challenges have prevented the world’s second-largest economy from gaining traction and have necessitated further policy interventions.
Economist Nie Wen highlights the urgency of providing policy support to reverse the trend of slowing growth. Falling prices have significantly affected companies’ profits, which, in turn, has had adverse effects on employment and income. Without adequate policy measures, China may enter a vicious cycle of declining growth.
To address these issues, the central bank is expected to cut interest rates and banks’ reserve requirement ratios (RRR) in the coming weeks. This would support lending to businesses, promote investments, and stimulate economic activity.
The Chinese government has already taken steps to support the economy, including interest rate cuts by five of China’s largest state banks. These cuts, the third round this year, indicate a move towards a more accommodative monetary policy. Additionally, plans to issue 1 trillion yuan ($140.89 billion) in sovereign bonds for investment projects have been announced.
Looking ahead, analysts anticipate that the government will focus on implementing more fiscal measures to support growth in the coming year. This would complement the monetary policy adjustments and provide a comprehensive framework to bolster economic recovery.
China’s economic challenges are further exacerbated by weak domestic demand and declining prices. In November, consumer prices experienced the sharpest decline in three years, while factory-gate deflation deepened. The survey conducted by the National Bureau of Statistics revealed that reduced overseas orders and insufficient domestic effective demand were the primary difficulties faced by companies.
The decline in new orders indicates a contracting market, adding to worries about the manufacturing sector. Moreover, weak external demand continues to be a major drag on factory activity, with new export orders contracting for the ninth consecutive month.
The contraction of the sub-index for factory gate prices highlights the presence of deflationary pressures and the resulting impact on business profits. These challenges parallel concerns about the country’s economic recovery.
In contrast to the manufacturing sector, the official non-manufacturing purchasing managers’ index (PMI), which includes services and construction, experienced a slight increase to 50.4 in December. This rise can be attributed to the recovery in the vast services sector. It provides some respite amidst the challenges faced by the manufacturing industry.
Despite the obstacles, China’s economic growth is expected to achieve the official target of around 5% this year. Additionally, the government aims to maintain a similar target for next year as well. However, the tepid performance of the manufacturing sector highlights the need for continuous monitoring and prompt action to support the recovery.
China’s manufacturing sector’s contraction for the third consecutive month raises concerns about the country’s economic recovery. Fresh stimulus measures are crucial to address the challenges posed by a severe property slump, local government debt risks, and soft global demand. The need for comprehensive policy support, including interest rate cuts and fiscal steps, is evident. Overcoming weak demand, declining prices, and deflationary pressures is vital to propel the manufacturing sector and ensure sustained economic growth.
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