China's Economic Struggles Deepen

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China’s economic challenges continued last month, with data suggesting the world’s second-largest economy is still struggling to regain momentum. Factory production in September appeared to have weakened for the fifth consecutive month, according to the Chinese statistics bureau's official Purchasing Managers' Index (PMI).

 

The PMI is an essential measure of economic activity, calculated based on industry surveys. A PMI reading above 50 indicates expansion, while a score below 50 signals contraction. In September, the headline PMI came in at 49.8, a slight improvement over August’s 49.1 but still signaling contraction. Since September 2023, the PMI has surpassed 50 only three times, with a peak of 50.8 in March. While manufacturing output rose to 51.2 in September from 49.8 in August, other indicators remained weak.

 

New orders slightly improved to 49.9, suggesting demand is still sluggish. Supplier delivery times dipped from 49.6 to 49.5, a change that could indicate either faster deliveries or softer demand. Finished goods inventories stood at 48.4, down marginally from the previous month, which may suggest businesses are either meeting demand or keeping inventories low due to a cautious outlook. The employment sub-index remained weak at 48.2, its 13th consecutive month of contraction, reflecting persistent stagnation in the industry.

 

China’s non-manufacturing sector, including services and construction, recorded a neutral 50.0 in September, a slight decline from 50.3 in August and the lowest level since September 2023. While the manufacturing sector remains below the 50-point threshold, September’s PMI reading was the highest since April. National Bureau of Statistics statistician Zhao Qinghe, cited by state media outlet Xinhua, noted that the data reflects some improvement in overall economic conditions and an increase in business production.

 

In response to these economic struggles, Chinese policymakers have introduced various initiatives aimed at boosting domestic demand. Measures include trade-in programs for older electronics and home appliances, and approximately $43 billion in long-dated bonds to support indebted local governments and drive growth through infrastructure projects. Despite these efforts, headwinds like the ongoing real estate crisis and high youth unemployment continue to pose significant challenges. Both Goldman Sachs and Citigroup have recently lowered their GDP growth forecasts for China to 4.7 percent for 2024.

 

In an effort to address these issues, China’s top financial regulators and central bank recently unveiled a sweeping stimulus package, the most ambitious since the pandemic. The package includes cuts to the reserve requirement ratio for banks, freeing up capital for loans, and instructions to banks to reduce mortgage rates by October 31. Chinese stocks responded positively, with a major rally marking the largest single-day gain since 2008.

 

However, some experts remain skeptical about the effectiveness of the measures. Economist George Magnus, a University of Oxford China Centre associate, told *Newsweek* that “China’s economy needs Keynesian-style consumption stimulus, tax reform, and greater government intervention to stabilize home sales and manage losses." Magnus likened the current relief plan to "administering painkillers to someone who needs surgery," highlighting concerns that the stimulus may not address the root causes of the economic malaise.

 

Based on a report from: Newsweek 2024-10-03