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China’s Manufacturing Activity Shrinks

In November, China recorded a decrease in the level of activity in the manufacturing sector and sphere of services.

China’s Manufacturing Activity Shrinks

The specified indicators have become the reason for the strengthening of the expectations that the Chinese government will take additional measures of state support for the world’s second-largest economy, which is currently striving for recovery through super-efforts.

The official manufacturing purchasing managers index of the Asian country fell to 49.4. The relevant information is contained in the statement of the National Bureau of Statistics (NBS), which was published on Thursday, November 30. The decrease in this indicator is recorded for the second month in a row. Economists predicted a negative scenario but expected a smaller decline.

The gauge of non-manufacturing activity in China, which is an indicator of the intensity of operations in the construction and services sectors, decreased to 50.2.

Zhou Hao, chief economist at Guotai Junan International in Hong Kong, says that the data on the purchasing managers’ index will strengthen expectations of government support. In his opinion, next year in China the focus will be on fiscal policy.

The Chinese CSI 300 index on Thursday in the morning session demonstrated restrained growth. This dynamic is because some traders expect that the local authorities will take additional steps to support the economic system due to the disappointment and clearly indicating that the situation is developing according to negative scenario data. The CSI 300 index is currently on track for a new low in 2023 and could become the world’s worst indicator for major stocks in November.

The Chinese economy is moving towards the officially designated goal of 5% growth. The probability of achieving the said indicator is not something fantastic or impossible, but experts have doubts about the ability of the economic system to maintain such a dynamic in 2024.

Currently, China is facing the problem of the decline of the real estate sector. A negative state of affairs in this sphere is the main threat to economic growth. A significant decrease in housing sales has affected other segments of the economic system. The decline in consumer activity in the real estate sector has led to a decrease in demand for furniture and household appliances.

At the beginning of this year, a revival in sphere services was recorded in China. This driver of economic growth has gradually slowed down.

The unfavorable situation in the Chinese labor market has caused consumers to take a more cautious approach to increasing spending.

In November, a sub-measure of new orders in Chinese factories reached a five-month low of 49.4. The situation with export orders is also rapidly deteriorating.

In recent months, the Chinese government has taken measures to maintain economic activity. As part of the relevant efforts, it was decided to increase sales of bonds for investment in infrastructure projects.

At the same time, the indicator of construction activity in China rose to 55 in November.

NBS senior analyst Zhao Qinghe said that this month economic activity in the Asian country continued to move towards stabilization, but the pace of the corresponding process slowed down. According to him, the foundation of the recovery still needs to be strengthened.

Zhao Qinghe also said that the decline in activity in sphere services in November is partly because in this case the indicator is compared with the situation observed in October, when during the so-called Golden Week, the mini-vacation season in honor of the Mid-Autumn Holiday and the Day of the Formation of the People’s Republic of China, when there is a traditional boom in travel and tourism.

Michelle Lam, economist for greater China at Societe Generale SA in Hong Kong, says that many analysts expected a reduction in manufacturing activity in the Asian country this month, but the final result turned out to be excessively negative. According to the expert, the observed state of affairs indicates that the process of restoring private demand is very fragile, and government incentives have not yet affected the indicators in the reports.

Economists Chang Shu and Eric Zhu say that the November results are a loud alarm signal about the state of China’s economic system and the effectiveness of the country’s leadership’s decisions to stimulate the development of processes in this space. They noted that the current situation confirms the need for additional political support.

Economists at Capital Economics Ltd, in an analytical note, argue that the Chinese government’s aid measures should remain a tailwind in the coming months. In their opinion, in the current situation, it is necessary to continue to improve the mitigation of real estate requirements. They said that Chinese politicians are refocusing on supporting the financing of developers.

Capital Economics Ltd experts also admit the resumption of Beijing’s policy of lowering interest rates. They explain the realism of this scenario by reducing the pressure on the yuan.

The media reports that a plan is currently being studied in China, in case of implementation of which unsecured loans will be offered to construction companies for the first time. Also, local authorities intend to compile a list of firms that are eligible for bank support. Both initiatives are part of a package of measures aimed at supporting the real estate sector.

Nomura Holdings Inc. experts predict another economic downturn by the end of this year and in the spring of 2024 in China. They explain their vision of the future by such factors as the reduction of deferred consumption of services and the deterioration of the situation in the real estate sector. In their opinion, the pain of another recession may prompt Beijing to become a lender of last resort, as a result of which large developers who have faced serious problems will be rescued, and the financing gap for the construction and delivery of pre-sold houses will be filled.

Bruce Pang, chief economist for Greater China at Jones Lang Lasalle Inc., believes that the Chinese government’s efforts are likely to continue to focus on stimulating demand. The expert also expects an increase in dependence on fiscal policy. In his opinion, the budget deficit ratio in China will reach 4.3% in 2024. Other experts predict that this figure will exceed 3%.

As we have reported earlier, China to Focus on Sustainable Growth.

Serhii Mikhailov

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Serhii’s track record of study and work spans six years at the Faculty of Philology and eight years in the media, during which he has developed a deep understanding of various aspects of the industry and honed his writing skills; his areas of expertise include fintech, payments, cryptocurrency, and financial services, and he is constantly keeping a close eye on the latest developments and innovations in these fields, as he believes that they will have a significant impact on the future direction of the economy as a whole.