China’s economy stabilises, factory activity returns to expansion

China’s factory activity expanded in September for the first time in six months, signaling a potential bottoming out of the country’s economy. The official purchasing managers’ index (PMI), which measures activity among major manufacturers, rose to 50.2 in September from 49.7 in August, surpassing the forecast of 50.0. This positive data comes on the heels of other indicators showing stabilization in the Chinese economy.

The initial burst of momentum early in the year had waned as China lifted its ultra-restrictive COVID-19 policies, resulting in a sagging economy. However, signs of improvement started to emerge in August, with increased factory output, retail sales growth, and a narrowing decline in imports and exports. Industrial profits also saw an unexpected jump of 17.2% in August, reversing the decline experienced in July.

Zhou Hao, the chief economist at Guotai Junan International, remarked that the manufacturing PMI and robust industrial profit figures suggest that the Chinese economy is gradually bottoming out. Another positive indicator is the non-manufacturing PMI, which includes service sector activity and construction, and rose to 51.7 in September compared to 51.0 in August. The composite PMI, including both manufacturing and non-manufacturing activity, also climbed to 52.0 in September, up from 51.3 in August.

The upcoming “Golden Week” holiday, the longest public holiday in China, is another factor economists are keeping an eye on. This period, which runs from the Mid-Autumn Festival on September 30 to the National Day break on October 6, will provide valuable insights into consumer spending trends. State media reported a record-breaking 20 million rail trips on the first day of the holiday, indicating strong consumer enthusiasm.

However, amidst the positive signs, Chinese policymakers still face challenges in addressing the property sector debt crisis that has impacted global markets. New home prices fell the fastest in 10 months in August, and property investment has declined for 18 consecutive months. China Evergrande Group, the world’s most indebted property developer, recently announced that its founder is under investigation for suspected “illegal crimes.”

To ensure that China’s economy meets the government’s growth target of around 5% for this year, analysts suggest that further policy support will be necessary. Zhiwei Zhang, the chief economist of Pinpoint Asset Management, highlights the importance of fiscal policy becoming more supportive. While it is likely to happen, Zhang anticipates that the change in fiscal policy will occur next year rather than this year.

In conclusion, China’s factory activity expansion in September, along with positive indicators across various sectors, points to a potential bottoming out of the country’s economy. However, policymakers must continue to address challenges in the property sector and provide further support to ensure sustained growth moving forward.