China’s Factory Slowdown and Services Slump Spark Calls for Stronger Economic Stimulus

China's factory activity contracted for the fifth consecutive month in September, while the services sector experienced its first contraction since December. Despite efforts by policymakers to stimulate growth, the slowdown highlights mounting pressures on Beijing’s ability to meet its 2024 growth target.

China’s Factory Activity Declines for Fifth Month, Services Sector Slows as Stimulus Calls Grow

China's factory activity declined for the fifth month in September, while the services sector experienced a significant slowdown. With only three months remaining, additional stimulus may be required to achieve Beijing's 2024 growth target.

On September 30, the National Bureau of Statistics (NBS) published its purchasing managers' index (PMI), which increased from 49.1 in August to 49.8 in September. Although the index remains below the 50-point threshold that distinguishes growth from contraction, it surpasses the median forecast of 49.5 in a Reuterspoll. The reading was the highest in five months.

In conjunction with a downbeat private-sector Caixin survey published on September 30, the data demonstrated that China's sprawling manufacturing industry continues to irritate policymakers. They have acknowledged that the economy is confronted with "new problems" and have called for a more robust stimulus.

The central bank and the top financial regulator unveiled additional, comprehensive measures on September 29. One requested that banks reduce mortgage rates for existing home loans before October 31.

The nation's most aggressive stimulus program since the COVID-19 pandemic was also implemented by authorities last week.

China’s Services Sector Contracts for First Time Since December as Property Market Woes Deepen

The non-manufacturing PMI, which encompasses services and construction, fell to 50.0 in September from 50.3 in August, the lowest reading in 21 months.

The construction PMI increased from 50.6 in the previous month to 50.7, while the services PMI experienced its first contraction since December last year, falling to 49.9.

On September 26, Reuters reported that the 1 trillion yuan ($142.56 billion) scheduled to be raised through special bonds will be allocated to improving subsidies for a consumer goods replacement program and upgrading business equipment.

Reuters also reported that China intends to raise an additional 1 trillion yuan through a distinct special debt issuance to assist local governments in addressing their debt issues.

According to officials who stated last week, the program has already increased the sales of household appliances, home decoration products, and automobiles.

On September 30, the Caixin services PMI indicated that the sector's activity had decreased.

Property deterioration is impacting the broader economic recovery, prompting top leaders at a Politburo meeting last week to advocate for measures to halt the decline in the housing market.

Reuters reported on September 27 that Shanghai and Shenzhen, two megacities, intend to eliminate critical home purchase restrictions in the upcoming weeks. They will join a lengthy list of smaller cities already implementing this measure.

According to analysts, the stimulus and a new fiscal package of approximately 2 trillion yuan are anticipated to be sufficient to achieve growth by the "around 5%" objective. However, the country must still address the challenges of weak demand and an increasingly hostile global trade environment.