China’s manufacturing sector showed signs of recovery in October, with the Purchasing Managers’ Index (PMI) edging up to 50.1, marking the first expansion in six months.
This uptick, combined with a slight rise in the non-manufacturing PMI to 50.2, suggests that Beijing’s recent stimulus measures are beginning to lift economic activity and boost confidence across sectors.
As China grapples with a sharp property market downturn and subdued consumer sentiment, this latest data signals potential early success for policymakers aiming to reach the year’s 5% growth target through renewed fiscal support.
The increase in October’s PMI, moving from September’s 49.8 and crossing the critical 50-point threshold that separates growth from contraction, indicates a gradual improvement in manufacturing.
Additionally, the non-manufacturing PMI, which covers both construction and services, crept up from 50.0 in September to 50.2 in October.
The positive momentum across sectors highlights the initial effects of Beijing’s strategic fiscal moves, especially the surge in government bond issuance over recent months.
A significant part of China’s renewed fiscal approach includes accelerating government spending, largely funded by a record government bond issuance seen in August and September.
These funds have reportedly bolstered infrastructure and other critical investments, infusing cash into sectors facing prolonged challenges, particularly construction and manufacturing.
According to Xu Tianchen, a senior economist at the Economist Intelligence Unit, the heightened issuance of bonds is a key driver of this initial recovery phase.
Xu noted that the extra liquidity provided by the bonds directly translates to fiscal spending, signaling the government’s determination to tackle both immediate economic concerns and long-term financial stability.
China’s bold stimulus package
In late September, China, led by President Xi Jinping, introduced a robust fiscal and monetary package aimed at stabilizing its economy amid signs of a downturn.
The stimulus plan features 2 trillion yuan (around $284 billion) in sovereign bonds, allocating half to ease the debt burdens of local governments and the other half toward consumer support initiatives.
The People’s Bank of China (PBOC) also cut key interest rates, reducing the 1-year medium-term lending facility rate to 2% and the main policy rate to 1.5%, aiming to lower borrowing costs and encourage lending across sectors.
To revive the struggling real estate market, the government lowered the minimum down payment for second-time homebuyers from 25% to 15%.
This reduction is intended to drive home purchases and bring stability to the property market, which has faced prolonged challenges.
In a move to uplift financial markets, Beijing has allocated 500 billion yuan in loans for investment funds and brokers, supplemented by 300 billion yuan to finance share buybacks for listed companies.
These measures are designed to bolster market confidence and counter the wealth erosion caused by the ongoing property crisis.
This comprehensive package marks a shift from earlier, more limited measures rolled out in May, underscoring Beijing’s commitment to a “whatever-it-takes” approach to economic stabilization as it pursues its 5% growth target for 2024.
Challenge lies in rebuilding consumer confidence
China’s economic challenges have been compounded by a struggling property market and tepid domestic demand.
However, early signs of recovery in manufacturing, alongside Beijing’s fiscal intervention, indicate that confidence might be gradually returning.
The proposed issuance of over 10 trillion yuan ($1.40 trillion) in additional debt in the coming years, primarily to address local government debts, could further shore up confidence and ensure a more stable fiscal outlook.
This large-scale debt issuance, anticipated to be approved soon, would provide crucial support for local governments managing significant off-the-books debt, allowing them to reinvest in local economies and stabilize financial conditions.
For China to sustain these early signs of recovery, it will need to manage key risks in both the domestic and international arenas.
Domestically, the challenge lies in rebuilding consumer confidence and addressing property market fragility, which remains a major drag on economic activity.
Externally, China’s manufacturing sector remains sensitive to global demand shifts, trade policies, and geopolitical tensions, particularly with major trading partners like the United States.
Overall, the October PMI expansion serves as an encouraging sign of China’s fiscal support making an impact, but sustained recovery will require continued policy adjustments and targeted support to navigate domestic and global uncertainties.
Policymakers are likely to maintain a fine balance between stimulating growth and managing debt risks to keep the world’s second-largest economy on course toward its growth goals.
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