Chinese factory activity expands ahead of expected economic support package

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Chinese factory activity strengthened for the first time in six months in October, in a heartening signal for policymakers as they prepare a crucial fiscal package to support the world’s second-largest economy.

The figures represent the last data release before a meeting next week of the standing committee of China’s rubber-stamp parliament, the National People’s Congress, which is expected to confirm the size of a fiscal stimulus to try to boost economic growth.

This month’s official purchasing managers’ index came in on Thursday at 50.1, higher than 49.8 in September and stronger than the average forecast of 49.9 by analysts polled by Bloomberg. A reading above 50 marks an expansion from the previous month.

The non-manufacturing PMI was 50.2 in October, slightly below analysts’ forecasts of 50.3 but also exceeding September’s reading of 50, as underlying domestic consumption remained weak.

Analysts estimate China needs to spend up to Rmb10tn ($1.4tn) over three years to restore confidence among domestic consumers, whose wealth has been hit by a deep property sector slowdown and job and salary cuts.

But many believe the government plans to direct most of next week’s stimulus package to fixing local governments’ balance sheets through debt swaps, as well as providing funds to buy land and unsold apartments to put a floor under the slumping property market.

Authorities unveiled an initial monetary stimulus push in late September that targeted the stock market and interest rates and sent China’s benchmark CSI 300 share index soaring as retail investors crowded back into equities.

Morgan Stanley analysts said ahead of Thursday’s data release that activity was probably supported by “accelerated fiscal deployment on infrastructure projects”, as the government sped up spending in the final months of the year in an effort to hit its growth target.

China’s economy grew 4.6 per cent year on year in the third quarter, short of the official full-year target of 5 per cent.

The government has since raised expectations for more action, after a highly anticipated briefing by state planners failed to lay out stronger fiscal support, disappointing investors and sending stocks sinking.

The finance ministry then signalled this month that the planned fiscal stimulus package would focus on local governments, many of which depend on property sales for revenue and have been devastated by the sector’s three-year slowdown.

Repairing local government finances would enable them to pay arrears owed to local suppliers and back-salaries to employees, as well as resume investing.

But economists have said doing so by swapping existing local government debt for new debt would not amount to stimulus because it would not involve more spending.

Commenting on a Reuters report this week that Rmb6tn of the planned stimulus would be in the form of local government debt swaps, Nomura economist Ting Lu said this “would not represent any incremental borrowing and could not be considered stimulus”.

What is needed instead, economists argue, is direct assistance to households, in the form of improved social welfare and healthcare programmes and other services to give families the confidence to spend again.

Chi Lo, senior market strategist at BNP Paribas Asset Management, noted that Beijing had “multiple policy goals beyond sustaining economic growth”, including “implementing structural reforms and reducing financial risk”. The government, he added, “has no target for fiscal spending”.