Chinese factory activity contracts in sign of economy losing momentum

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China’s manufacturing activity contracted for the second month in November, indicating weakening momentum in the world’s second-largest economy despite increased government efforts to boost growth.

The country’s official manufacturing purchasing managers’ index came in at 49.4 this month, lower than a median forecast of 49.8 in a Bloomberg poll and slightly below a reading of 49.5 in October. A reading below 50 marks contraction from the previous month.

The non-manufacturing PMI came in at 50.2, remaining in positive territory but marking the lowest reading since China was swept by Covid last December. It was also well below the Bloomberg analyst poll estimate of 50.9 and lower than October’s 50.6. The services industry activity component of non-manufacturing PMI registered a contraction at 49.3 points compared with a reading of 50.1 the previous month.

“That’s a bit of a setback I think because of course the services sector — particularly private consumption demand, services demand — was supposed to be a pillar of strength and lost momentum into November,” said Frederic Neumann, chief Asia economist at HSBC.

The declines present a challenge for policymakers, who are under pressure to tackle a slowdown in the country’s debt-stricken property sector and revitalise the broader economy.

They also followed better than expected gross domestic product growth of 4.9 per cent year on year in the third quarter, which had raised hopes that China’s economy, slow to recover after the pandemic, was turning a corner.

The weaker PMI data paints a picture of an economy that is losing momentum as it heads into 2024.

Profits at China’s industrial companies rose 2.7 per cent in October from a year earlier, official data released this week showed, slowing from 11.9 per cent in September and 17.2 per cent in August.

Authorities might need to provide further support to counter weak global demand into 2024, analysts said.

“I think the market is expecting signals for more support measures. Is it going to be more fiscal stimulus in the pipeline, what’s the thinking around monetary easing? Because there is a sense that without further policy support, the economy will struggle to reach 5 per cent next year organically,” Neumann said.

Nomura analysts said ahead of the PMI release that they expected a reading of 49.3 for November.

They said they expected the economy to “dip” again at the end of this year and into the “spring” of 2024, as a weakening property sector curbed growth.

External demand for Chinese goods is also expected to remain weak, while investment in green industries could peak.

“The pain of another dip may finally convince Beijing to play the role of lender of last resort to rescue some major troubled developers and fill the vast funding gap for building and delivering those pre-sold homes,” Nomura said.