China's Factory Activity Shrinks for 5th Month

The decline in China’s factory activity modestly narrowed in January, indicating higher demand ahead of the Lunar New Year celebrations starting Feb. 10.

Meanwhile, Hong Kong’s economy accelerated to grow 4.3% on the year during the fourth quarter of 2023, thanks to continued strength in inbound tourism – largely from the mainland.

The manufacturing purchasing managers’ index (PMI), compiled by the National Bureau of Statistics (NBS), dropped to 49.1 in February from 49.2 in January.

This downturn intensifies pressure on policymakers to implement additional stimulus measures as factory owners grapple with dwindling orders.

The figure falls below the critical 50-mark, indicating contraction and aligning with a Reuters poll’s median forecast.

The official PMI decline may be influenced by seasonal factors, primarily the Lunar New Year, which occurred on February 10 this year.

The festivities led to factory closures as workers returned home for the holiday. Despite the official PMI contraction, a survey by Caixin/S&P Global, released shortly after, depicted a steady expansion in manufacturing activity.

Both production and new orders grew at a faster pace, highlighting an uneven economic recovery.

Chief Economist Dan Wang at Hang Seng Bank China attributed the dip in the official PMI to a sharp contraction in new foreign orders, indicating a potentially prolonged weakened demand from overseas markets.

The persistent shrinkage of new export orders for 11 consecutive months and a year-long contraction in factory employment signal ongoing challenges for Chinese businesses.

China’s post-COVID recovery, marked by sub-par growth over the past year, raises doubts about the sustainability of its economic model.

This has fuelled expectations that policymakers will need to consider more substantial reforms to support long-term growth.

The economic hurdles include a property crisis, consumer spending hesitancy, foreign firms divesting, manufacturers struggling to find buyers, and local governments grappling with substantial debt burdens.

Despite the manufacturing setback, the official non-manufacturing PMI, encompassing services and construction, rose to 51.4 from 50.7 in January.

This marks the highest reading since September last year, attributed to robust activity during the Lunar New Year holidays.

However, construction activity experienced a slight decline of 0.4 percentage points due to continued contraction in property-related activities.

Policymakers, acknowledging the need for economic support, have pledged additional measures.

The People's Bank of China recently cut the reserve requirement ratio (RRR) for banks, releasing 1 trillion yuan ($139.03 billion) in long-term liquidity.

President Xi Jinping, highlighting the importance of supporting manufacturers, chaired a meeting on economic policy, focusing on equipment upgrades and reducing logistics costs.

This aligns with the broader push to rebalance the economy by leveraging technology for productivity gains and income increases.

While China has yet to release its 2024 growth target, insiders anticipate a maintenance of a similar growth target to last year, around 5 per cent.

On the other hand, the 4.3% increase in Hong Kong’s gross domestic product for the October to December quarter was faster than the 4.1% in the previous quarter, according to the city’s census and statistics department. The annual growth rate turned out to be 3.2%, on par with a revised government forecast in November.

A government spokesperson attributed inbound tourism and private consumption to be the “key drivers.” The export of services – mainly tourism-related items – grew by 22.1% during the fourth quarter. This helped cover a slower 2.8% increase in exports of goods, on which the city’s economy relies.

However, the spokesperson cautioned that “the difficult external environment will continue to pose pressure on Hong Kong’s exports of goods in 2024,” especially hinging on the performance of mainland economy.

March 01, 2024