China hints at stimulus as weak data raises expectations

China hints at stimulus as weak data raises expectations

Chinese Authorities Face Pressure Amid Dull Economic Data

The Chinese government released policy guidelines on Monday but failed to provide concrete measures to boost the country’s economy and domestic consumption. This left investors wanting more as dull activity data intensified pressure on officials to take action.

Deteriorating Economic Climate

Official surveys showed that manufacturing activity in the world’s second-largest economy fell for the fourth consecutive month in July. Additionally, the services and construction sectors were on the brink of contraction. These findings pose a significant threat to growth prospects for the third quarter.

Amidst these concerns, officials at a news conference organized by the state planner only made vague promises to “study and formulate policies.” This disappointed hopes that more stimulus measures were forthcoming, despite positive hints from a recent Politburo meeting and a subsequent stock market rally.

“Looking forward, policy support is needed to prevent China’s economy from slipping into recession, not least because external headwinds look set to persist for a while longer,” warned Julian Evans-Pritchard, head of China economics at Capital Economics.

Evans-Pritchard emphasized, “Unless concrete support is rolled out soon, the recent downturn in demand risks becoming self-reinforcing.”

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Economic Growth at Risk

China’s economic growth in the second quarter was sluggish due to weakening demand at home and abroad. Analysts now caution that the government’s economic growth target of around 5% could be at risk for the second consecutive year.

However, policymakers may be hesitant to deliver aggressive stimulus measures to boost domestic consumption due to growing concerns about debt risks. Despite the urgency of the situation, worries about increasing debt levels may outweigh the need for immediate action.

Concerns in the Construction Sector

The latest data revealed that China’s construction sector, which is a significant employer, experienced its weakest activity since the dissipation of COVID-19-related workplace disruptions in February. This finding is based on the National Bureau of Statistics’ official Purchasing Managers’ Index (PMI).

“The sharp fall in construction activity is a worrying sign of a potential death spiral in the property sector,” remarked Xu Tianchen, senior ANBLE at the ANBLE Intelligence Unit.

Nevertheless, there are indications of improvement in inventory levels, suggesting that China’s manufacturing sector may have bottomed out in the second quarter after a period of destocking. The manufacturing PMI edged up from 49.0 in June to 49.3 in July, but it still remains below the 50-point mark that separates expansion from contraction.

This prolonged contraction in the manufacturing sector indicates negative sentiment among factory managers, which has become exceptionally persistent. Moreover, the non-manufacturing PMI, which includes sub-indexes for service sector activity and construction, dropped from 53.2 in June to 51.5 in July. Similarly, the sub-index for construction fell from a high of 65.6 in March to 51.2 in the present month.

The Need for Substantive Actions

Earlier this month, China’s top leaders pledged to intensify economic policy support, focusing on expanding domestic demand, boosting confidence, and addressing risks. However, foreign investors insist that policymakers need to go beyond mere promises and take substantive actions to fix the country’s ailing property sector and reduce debt burdens before confidence can be restored.

Foreigners’ net stock purchases in China for the year have stagnated around 230 billion yuan ($32.2 billion) after a net inflow of 186 billion yuan in the first quarter. This suggests that the economy has lost the post-pandemic momentum. Multinational companies are also seeking better financial or in-kind incentives, as well as reassurance amid an increasingly unpredictable regulatory environment.

The support measures announced by China’s State Council on Monday, which target domestic consumption, including areas such as electric vehicles, housing, and tourism, have fallen short of the specific stimulus expected by investors. The PMI data further reinforces the key role that domestic consumption needs to play in revitalizing the recovery, particularly as new export orders continue to decline.

The overall sub-index for new orders in the PMI also indicated a contraction in July, albeit at a slower rate than the previous month. This “suggests further downward pressure for the coming months,” according to Dan Wang, chief ANBLE at Hang Seng Bank China.

The lack of concrete policy measures amid stagnant economic data puts Chinese authorities in a challenging position. As they navigate the delicate balance between stimulating domestic consumption, reducing debt risks, and addressing the needs of the property sector, their actions will be closely scrutinized by domestic and international stakeholders alike.

$1 = 7.1521 Chinese yuan renminbi

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