China’s manufacturing activity has experienced a decline for the second consecutive month in June, with the National Bureau of Statistics (NBS) purchasing managers’ index (PMI) standing at 49.5. This figure, below the threshold of 50 which separates growth from contraction, has raised concerns about the need for further stimulus to revive the economy. While some experts believe that the official PMI may not accurately reflect the current export momentum, there are still challenges in terms of external and domestic demand that could hinder a recovery in producer prices.
In addition to the struggles in the manufacturing sector, China’s services activity has also taken a hit, sinking to a five-month low in June. The non-manufacturing PMI, which includes services and construction, fell to 50.5, with the services PMI dropping to 50.2. This decline in the services sector is attributed to a protracted property crisis that continues to weigh on domestic demand, despite efforts to boost fiscal stimulus and kickstart consumption.
Analysts anticipate that the Chinese government will implement more policy support measures in the near future to address the weak PMI figures. While there are limitations to monetary policy easing due to pressure on the Chinese currency, fiscal policy is expected to play a more significant role in boosting domestic demand. However, concerns about high local-government debt and deflationary pressure still loom over the prospects for economic recovery, dampening the expectations of investors and factory owners alike.
China’s central bank has introduced a relending programme for affordable housing in an effort to stimulate sales and better align supply with demand. Officials are also under pressure to reduce the economy’s reliance on the property sector and focus on developing new growth engines. Premier Li Qiang highlighted the importance of new industries in supporting economic development, stating that China’s economy has shown improvement since the beginning of the year. However, challenges remain as the country seeks to navigate the impact of ongoing trade tensions and internal economic pressures.
As China prepares for the upcoming Third Plenum meeting, where top Communist Party officials will gather to discuss strategic priorities, the focus will be on setting the course for economic growth in the coming years. With the global economy facing uncertainty and China grappling with internal challenges, the decisions made at the Third Plenum will have far-reaching implications for the country’s future trajectory. As economists and investors await the outcomes of this pivotal meeting, the need for bold and decisive action to address the current economic challenges has never been more pressing.