China has been relying on its manufacturing might and export engines to offset the drag from a slumping property market and keep its growth target in sight.
Growing headwinds on both fronts suggest the government will need to step up support if it’s to hit that goal of an expansion of around 5%.
Factory activity contracted for a fourth straight month in August, with sub indexes showing deepening deflationary pressures, according to data on Saturday. Meantime, the latest sales figures showed that the residential slump deepened as expectations of a further drop in new-home prices hampered efforts to cushion the downturn.
The property funk is weighing on China’s $17 trillion economy and recent government efforts have yet to turn things around. Economists at banks including UBS Group AG and JPMorgan Chase & Co. expect China to fall short of delivering on its growth target, while others are calling for increased stimulus to boost sentiment.
“The economy will need more policy support to pull out of its extended period of weakness,” Bloomberg Economics’s Chang Shu and Eric Zhu wrote in a note. “Government spending will have to remain the key lever to lift aggregate demand when private demand is not forthcoming — and the pace needs to accelerate.”
The official manufacturing purchasing managers’ index declined to 49.1 from 49.4 in July, the National Bureau of Statistics said. The median forecast of economists surveyed by Bloomberg News was 49.5. The reading has been below the 50-mark separating growth from contraction for all but three months since April 2023.
Goldman Sachs Group Inc. economists including Yuting Yang and Andrew Tilton pointed out that both the input-cost and output prices sub indexes declined in August. “Price indicators in the NBS manufacturing survey suggest deflationary pressures picked up significantly,” they said.
In a separate report, the Goldman economists examined China’s fiscal stance and said year-to-date data show rising risks that revenues from tax and land sales will fall short of the budget projection this year. That will weigh on government spending if there’s no upward revision to the official deficit target and no extra-budget quotas for government bond issuance, they wrote in a note dated Sept. 1.
“We believe more fiscal easing is necessary to help secure the ‘around 5%’ full-year growth target,” they said.
In statement accompanying the PMI data, NBS analyst Zhao Qinghe attributed the latest contraction to high temperatures, heavy rainfall and a seasonal slackening of production in some industries. The non-manufacturing measure of activity in construction and services rose to 50.3, boosted by consumption during the summer holiday season, the statistics office said.
As trade tensions with the US and Europe increase, headwinds for the manufacturing sector are growing. For the mid-term outlook, much will depend on the outcome of the US election: Former President Donald Trump has argued for 60% tariffs on Chinese imports, while Vice President Kamala Harris’s China policies are expected to be more in line with President Joe Biden’s approach.
On the property front, the latest data was also discouraging.
The value of new-home sales from the 100 biggest real estate companies fell 26.8% from a year earlier to 251 billion yuan ($35.4 billion), faster than the 19.7% decline in July, according to preliminary data from China Real Estate Information Corp.
At least 10 city governments have loosened or scrapped their new-home price guidance to let market demand play a bigger role, a move that is expected to drive more real estate companies to cut prices.
China is considering allowing homeowners to refinance as much as $5.4 trillion of mortgages to lower borrowing costs for millions of families and boost consumption, Bloomberg News reported Friday. While lower mortgage rates would hurt profitability at state-run banks, analysts say it might help the real estate sector.
“In essence, it’s a transfer of wealth from banks to households, so positive for consumption,” said Larry Hu, head of China economics at Macquarie Group Ltd. “But the size is too small to be a game changer, given the current consumption landscape in China, which is pretty dire.”
The growth headwinds have yet to result in a more forceful government response, with less than half of budgeted expenditure completed in the first seven months of 2024. On Friday, Finance Minister Lan Fo’an said the economy is still growing at a clip of 5%, describing its performance in the first half as “generally stable and progressing steadily.”
But economists are calling for more support, especially if external demand wanes.
“The fiscal policy stance remains quite restrictive, which may have contributed to the weak economic momentum,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management. “To achieve economic stabilization, the fiscal policy stance needs to be become much more supportive. With the US economy slowing, exports may not be as reliable a source for growth as it was in the first half.”
