China PMIs Signal Continued Weakness, Backing Case for Bolder Policy Action — Update

China's latest batch of manufacturing and services activity data didn't give much to cheer about, backing the case for stronger policy action to tackle deepening economic challenges.

The official purchasing managers index signaled shrinking activity for a fifth straight month in September, pointing to continued fatigue in the world's second-largest economy, data released Monday by the National Bureau of Statistics showed.

While September's headline reading rose to 49.8 from August's 49.1, beating expectations in a Wall Street Journal poll of analysts, it stayed under the 50-mark separating activity expansion from contraction.

China's nonmanufacturing PMI, which covers service and construction activity, edged down to 50.0 in September from 50.3 in August.

The subindex that tracks service activity fell back to contractionary territory at 49.9 in September from 50.2 in August, underscoring tepid consumer demand, while the construction subindex rose to 50.7 from 50.6.

Private gauges of China's manufacturing and services activity released Monday slipped in September, also suggesting weakness in the economy.

The Caixin manufacturing PMI fell to 49.3 in September from 50.4 in August, according to data released by Caixin Media Co. and S&P Global. That was the lowest reading since July 2023.

"Market conditions in the manufacturing sector worsened in September, marked by a limited expansion in supply and a significant contraction in demand," said Wang Zhe, senior economist at Caixin Insight Group.

The Caixin services PMI fell to 50.3 in September from 51.6 in August, as "market optimism weakened significantly," said Wang. "Businesses expressed concerns about economic uncertainties in the near future."

Monday's data comes shortly after Chinese policymakers orchestrated a "shock and awe" display of stimulus that underscored a growing sense of urgency to lift the economy.

Last week, China's central bank announced a flurry of monetary and property easing actions. The policy blitz was followed by a surprise meeting of China's top leaders on Thursday pledging even more support for the economy. The extraordinary coordinated package of policy moves has sparked hopes that authorities are readying the kind of aggressive fiscal expansion and bold property rescue economists view as key to a meaningful growth revival.

"We believe the persistent growth weakness has hit policymakers' pain threshold, and the policy put has been triggered," economists at Goldman Sachs said in a recent note.

While China's shift from drip-feeding economic support to "bazooka-style" stimulus has been welcomed, doubts remain over whether a rebound will soon materialize. Concerns about policy implementation lags remain, given the muted, fleeting effects of previous rounds of policy efforts.

"Given widespread debt deflation pressures...and depressed sentiment among households, private businesses, and local government officials, the odds are that it will take more than what has been announced to create a cyclical recovery," analysts at BCA said in a note.

Considering the central role that the property sector plays in China's economic malaise, analysts say destocking housing inventories remains key.

Without bold policy to address this issue, a prolonged and grinding recovery is on the cards, Duncan Wrigley, an economist at Pantheon Macroeconomics, said in a note.

With the current policy approach favoring investment that could exacerbate supply-demand imbalances, economists say Beijing should move to provide better social welfare benefits to boost consumption and break the debt-deflation loop.

"What is missing is any sign of a bold reform plan to channel more state resources to the social security net," Pantheon Macroeconomics' Wrigley said.

Such efforts would require more fiscal firepower.

While it remains unclear how much Beijing is willing to spend, many economists now expect a sizable budget revision by the end of the year.

As the final quarter of the year approaches, expectations are high that Beijing might finally pull the fiscal trigger as it strives to meet an annual growth target of around 5% that looks increasingly challenging.

"Given that confidence issues have become so entrenched among households and corporates, forceful fiscal expansion is indispensable to jump-start the credit engine and uphold aggregate demand," economists at Citi said in a note.

Write to Singapore editors at singaporeeditors@dowjones.com

(END) Dow Jones Newswires

September 29, 2024 23:47 ET (03:47 GMT)

Copyright (c) 2024 Dow Jones & Company, Inc.