China’s manufacturing sector hits a 6-month low in August, fueling concerns about economic recovery and raising the need for urgent policy shifts towards boosting consumer spending.
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China’s Manufacturing Sector Cools in August
China’s manufacturing sector slowed in August, reaching a six-month low, an official factory survey showed on Saturday. The official Purchasing Managers’ Index fell for the fourth straight month to 49.1 in August from July’s 49.4. This is below the 50-mark that separates growth from contraction and also below a median forecast of 49.5 in a Reuters poll. The decline has added to expectations that Chinese policymakers will introduce fresh stimulus measures, shifting the focus from infrastructure projects to households.
The Non-Manufacturing Sector Posts a Modest Gain
Contrary to the manufacturing sector, China’s non-manufacturing purchasing managers’ index, which covers services and construction, posted a slight gain. This sector rose to 50.3 in August from 50.2 the previous month. Still, this was gloomy for the overall economic forecast. The world’s second-biggest economy began the second half of the year on shaky ground as crucial indicators in July, including exports, prices, and bank lending, cooled further, showing softening demand. A recovery many analysts had expected after China removed its most draconian COVID-19 restrictions in 2022 has fallen short of expectations thus far.
Policy Focus Shifts from Infrastructure to Consumer Spending
China’s worsening economic woes have made policy makers rethink their long reliance on high infrastructure investment. Last month, Beijing went some way to acknowledging that fact when it indicated it was willing to tilt more of the stimulus toward consumer spending. In doing so, it won wide praise from analysts, targeted consumer support seen as particularly positive.
Experts say this won’t be enough, though, to meet China’s annual growth target of about 5% without more policy measures. Some good news did come last month for economists: retail sales came in better than expected. So far, at least, details remain scant about how the government intends to revitalize its tremendous consumer market. All officials have promised so far is to focus on expanding domestic demand by boosting consumption.
Property Slump Weighs on Consumer Confidence
The persistent downturn in China’s property sector, struggling for the last three years, is one of the key factors weighing on consumer spending. Once accounting for a quarter of the Chinese economy, about 70% of household wealth was tied up in real estate. However, the slump in property prices has ushered consumers to rein in spending.
New data reveals that policies aimed at restoring confidence in the property market have been ineffective, after new home prices in China fell in July at the fastest rate in nine years. A Reuters poll on Friday estimated home prices would drop 8.5% in 2024, against a drop of 5.0% projected by a similar survey last May. The trend shows these measures to stabilize the property market have yet to find traction with consumers and further dampen the prospect for an economic rebound.
Outlook: China’s Economy after a Few Decades
China’s economic challenge underlines the high wire act that policymakers have to thread between stimulating household spending and reining in broader risks. Consumer confidence is still fragile, particularly in real estate; therefore, all ways to recovery are very far from certain. Unless more aggressive and targeted policy intervention is implemented, analysts say, it would be difficult for China to achieve its goals in growth and fully recover from the prolonged impacts of the pandemic and other structural economic challenges.
