China’s factory activity sparks hope manufacturing slump is bottoming out

SHANGHAI - China’s manufacturing activity fell for a fifth consecutive month in August, though pickups in new orders and output provided hope the worst of a factory slump dragging on the nation’s economy may be ending.

The official manufacturing purchasing managers’ index (PMI) was in contraction at 49.7 in August, according to the National Bureau of Statistics (NBS).

Still, that reading was better than expected, having been bolstered by expansion in several areas that signalled the beginnings of a revival in activity for the nation’s factories. A gauge of non-manufacturing activity also expanded, though it was slightly weaker than estimates.

“Perhaps we have seen a bottom in sentiment among manufacturers after the recent policy support measures from the authorities,” said Mr Alex Loo, macro strategist at TD Securities.

He pointed to a jump in production and an improvement in new orders for manufacturers, the first time the latter sub-index has been in expansion since March.

Investors are looking for any signal that government policies to support the economy’s flagging recovery are taking hold.

The nation’s manufacturers have been struggling for months because of a slump in global demand and subdued domestic spending.

Policymakers are reluctant to roll out massive stimulus, with some economists suggesting the official annual growth target of about 5 per cent is at risk.

The authorities have, however, rolled out targeted policies in recent weeks. The policies include plans to increase consumer goods manufacturing and car sales, such as lowering costs for electric vehicle charging and extending tax breaks.

Production and new orders for automakers both showed “robust activity on both the supply and demand ends”, NBS analyst Zhao Qinghe said in a press release accompanying the PMI figures.

While factory activity offered signs of rebound, Thursday’s data showed spending on services is starting to ease, dimming a bright spot for the economy. A sub-gauge measuring the sector was 50.5 in August – above the 50 mark separating expansion from contraction, but the weakest reading since December.

“Demand remained insufficient,” said Mr Bruce Pang, chief economist and head of research for greater China at Jones Lang LaSalle.

“With the boom of ‘consumption revenge’ ebbing, it is becoming a concern whether service spending can continue expanding in a sustainable manner. Additional stimulus, its implementation and the impact it will cause will be key to watch next.”

The reason for the measured policy response is that the authorities are wary of driving up debt and exacerbating financial risks.

A gloomy income and job outlook has also meant that businesses and households are reluctant to borrow, making it hard for easing measures to have a material impact on economic activity.

The People’s Bank of China has cut policy interest rates twice in 2023, though, while the nation’s biggest lenders are expected to trim rates on existing mortgages in a significant move to support growth.

The authorities have also pledged in recent days to speed up fiscal spending. The central bank on Wednesday met companies and banks to push for better funding access for private companies.

Local governments have also accelerated the pace of borrowing for infrastructure investment, a move that could help lift economic growth. Thursday’s data showed a pickup in construction activity – an improvement reflecting “a strong will” by the authorities to boost infrastructure to shore up growth, Mr Pang said.

Even so, NBS’ Mr Zhao acknowledged that the surveys showed “insufficient market demand remains a major problem”.

“The foundation for manufacturing recovery still needs to be consolidated further,” he said. BLOOMBERG