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China’s Economic Challenges Persist as Manufacturing Contracts Again

China faced another setback as its manufacturing activity shrank for the second consecutive month in November. The decline, faster than in October, indicates a need for more stimulus to revive economic growth and instill confidence in the government’s ability to support the industry.

Despite the third-quarter data exceeding expectations and fostering optimism for growth, factory managers’ negative sentiment deepens. This is fueled by weak demand both domestically and internationally. The official Purchasing Managers’ Index (PMI) dropped to 49.4 in November, below the critical 50-point threshold that separates contraction from expansion. This was lower than the anticipated 49.7, with only Goldman Sachs and Standard Chartered accurately predicting this downturn out of 31 respondents.

Both the new orders and new export orders components contracted, emphasizing the sustained challenges faced by the manufacturing sector.

Guotai Junan International’s economist, Zhou Hao, stressed the importance of policy support in response to these figures. He expects fiscal policy to play a central role in the upcoming year. China’s economy has grappled with various issues, including a property market crisis, local government debt risks, slow global growth, and geopolitical tensions.

Factory PMI contracted for seven of the last eight months, with improvement only in September. This prolonged decline hasn’t occurred since the months before October 2019, pre-COVID-19.

Analysts warn of a potential Japanese-style stagnation unless policymakers redirect the economy towards household consumption and more efficient resource allocation. China’s central bank governor aims for robust, lasting growth by 2024, urging reforms to lessen dependence on infrastructure and property.

To sustain a growth target of around 5% for next year, the government may need to implement further stimulus. The central bank can’t easily add more monetary stimulus due to worries about widening interest rate gaps with the West. This could weaken the currency and prompt capital outflows.

In October, China disclosed a plan to release 1 trillion yuan in sovereign bonds by year-end. This raises the 2023 budget deficit target to 3.8% of GDP from the initial 3%.

A separate reading on the non-manufacturing sector also showed weakening, falling to 50.2 in November from 50.6 the previous month, indicating a continued slowdown in the vast service sector and construction. The challenges faced by both manufacturing and non-manufacturing sectors emphasize the complexity of China’s current economic landscape.

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