Chinese factory activity rises in August but remains contractionary
China’s factory activity showed improvement in August due to stronger demand, yet it continued to operate in contraction. Meanwhile, services activity remained subdued, highlighting persistent imbalances within the economy and intensifying calls for policy interventions to stimulate growth. The divergence between manufacturing and service sectors indicates that China will persist in depending on manufacturing and exports to propel growth, as momentum faces challenges from subdued domestic consumption and investment. The official manufacturing purchasing managers’ index increased to 49.8 from 49.2 in July, according to a survey conducted by the National Bureau of Statistics, remaining below the critical 50-mark that delineates growth from contraction. It surpassed the median forecast of 49.6 in a poll.
Data indicated that both demand and output experienced improvement in August, as the sub-indexes for new orders and production returned to expansion territory, surpassing the 50 mark. “Domestic demand seems to be coming back, although it’s more likely to have been driven by AI and exports than by policy expansion,” said Xu Tianchen. Zhiwei Zhang stated that it was premature to determine that the economy had recovered. The non-manufacturing purchasing managers’ index, encompassing services and construction, held steady at 49.0, aligning with July’s reading, which represents the lowest level since December 2022. “Because China’s services sector is primarily domestically focused, this suggests domestic demand remained relatively sluggish in August,” Lynn Song said in a note. “For now, the PMI data suggests that we are due for another month of relatively sluggish domestic activity data in August, with any potential rebound likely to be limited.”
The August PMIs for equipment manufacturing and high-tech manufacturing both registered above 51, whereas consumer goods and high-energy-consuming industries remained in contraction, as per data released by the NBS. Zhang Liqun noted that the manufacturing PMI reading continues to indicate contraction, suggesting that business confidence remains unstable. “Continued government investment in public goods should be strengthened to effectively drive increased orders for businesses, continuously consolidate and enhance business confidence, and further strengthen factors contributing to economic stabilisation and recovery.” Economic data released earlier this month indicated that growth continued to face challenges at the beginning of the second half, as both goods consumption and industrial output exhibited a deceleration.
Fixed-asset investment continued its downward trajectory, while the property market remains entrenched in a protracted slump, now extending beyond five years without a clear indication of recovery. Exports continued to be a significant contributor to growth, bolstered by strong demand for AI-related shipments that elevated prices for high-tech goods produced in China. However, the profit pressures experienced by manufacturers dependent on domestic demand negatively impacted overall industrial profits. China’s top leaders committed in late July to implement further policies aimed at bolstering the economy, which has experienced a deceleration to a more-than-three-year low of 4.3 percent in the second quarter. They also promised to expedite fiscal spending on infrastructure projects that have already been budgeted for the remainder of the year.
The finance ministry has recently broadened loan interest subsidies for small private firms and consumers to stimulate demand. Meanwhile, the central bank announced this month that it would implement measures without indicating any explicit reductions to policy rates or the banks’ reserve-requirement ratio. ING’s Song stated that the positive impact from interest subsidies “may be relatively marginal,” and anticipates additional measures in the coming weeks. In a clear indication that the government is unlikely to introduce extensive stimulus measures, a recent article, asserted that China does not depend heavily on robust policy stimulus and is fully capable of meeting its annual economic growth target.
