China’s manufacturing sector experienced a slowdown in August, hitting a six-month low, according to an official factory survey released recently. This decline has raised expectations that policymakers will introduce new strategies to channel more stimulus towards households rather than infrastructure projects.
Manufacturing PMI Decline
The official Purchasing Managers’ Index (PMI) dropped to 49.1 in August, down from 49.4 in July. This figure is below the 50-mark, which signifies a contraction in growth, missing the median forecast of 49.5 in a Reuters poll. On the other hand, the non-manufacturing PMI, which includes services and construction, actually accelerated to 50.3 from 50.2.
The second-largest economy in the world started the second half of the year with a sluggish performance, with disappointing export figures, price trends, and bank lending data for July indicating a weakening demand. Despite initial expectations of a recovery following the lifting of strict COVID-19 restrictions in China, the economy has not shown significant signs of improvement.
Last month, the Chinese government hinted at a shift from its usual strategy of investing heavily in infrastructure projects. While there is support for boosting consumer spending, analysts caution that more policy interventions may be necessary to achieve the annual growth target of around 5%. Although retail sales surpassed expectations in the previous month, specific details regarding plans to revitalize the consumer market are yet to be revealed.
Consumer spending has been hindered by a significant downturn in the property sector over the past few years. With a substantial portion of household wealth tied to real estate, which previously accounted for a significant portion of the economy, consumers have been holding back on spending. Efforts to restore confidence in the market have not yielded the desired results, as evidenced by the sharp decline in new home prices in July.
A recent Reuters poll indicated that home prices are expected to decline by 8.5% in 2024, a deeper decline compared to previous forecasts. This projection underscores the challenges facing the Chinese economy and the need for effective policy measures to stimulate growth and consumer demand. As China navigates through these economic headwinds, policymakers will have to devise innovative strategies to steer the economy back on track.