Declining prices and orders negatively impacted the Chinese manufacturing sector.
Chinese manufacturing activity witnessed an expansion for the first time in six months in October. The impetus for this is attributed to the largest stimulus package which Beijing rolled out in September. The package had aimed to pull growth rate towards the 5% target and push investments and lending back into action.
The manufacturing sector was negatively impacted by declining prices and orders, and it resulted in investors withholding capital. However, the early signs of this stimulus package have had a positive effect on the sector and will be instrumental in attracting more investments over time. Retail and factory output sales have also surpassed the predicted targets, which suggests an increase in demand.
With demand and supply slowly turning upwards, the government is set to approve an issuance of 10 trillion yuan ($1.40 trillion) in extra debt for the next couple of years, next week. The issuance will mainly help local governments address the risks pertaining to off-the-book debts.
The stimulus package, which had also been designed to tackle the issue of unemployment is proving to be fruitful as youth unemployment reduced in September. The package which offered employment subsidies enabled firms to provide employment opportunities to millions of recent graduates.
This package hopes to accelerate domestic demand to make up for the slowing down of external demand. The purchasing managers’ index (PMI) rose 49.8 to 50.1 in September. Large and medium size firms witnessed an increase from 50.6 to 51.5 and 49.2 to 49.4 respectively. Small size firms, however, experienced a contraction. Nevertheless, this is a sign that the economy is shifting gears and is improving, just as the stimulus package had intended. Along with the manufacturing sector, the non-manufacturing sector has also witnessed a slight increase, with the PMI rising from 50.0 last month to 50.2 in October.
The only sore spot was the export sector, which has consistently been a strong force of the Chinese economy. Shipments rose by a meagre 2.4% in September. The upcoming US elections are also likely to cause upheavals for Chinese exports if Republican candidate Donald Trump assumes office. Higher tariffs will most likely be levied on Chinese goods, resulting in unfavourable conditions to drive exports.
In late September, the Chinese central back slashed interest rates and took measures to push the housing market which resulted in increased demand for the housing market in October. A normalized adjustment mechanism which meant the lowering of mortgage rates was also implemented in a bid to drive up property sales.
Economists are also predicting that despite the US election results, the stimulus will be much larger. The nature of the package will most likely be determined by the stock markets and not who will be the next POTUS. While Chinese stocks had experienced some gains in September, in the last month, they have tempered. The degree of stock market volatility has a major impact on economic confidence.
Therefore, the stimulus package must be prepared to withstand any sudden changes in the stock markets. Policymakers and economists are assured that erratic changes in the markets are unlikely unless significant policy changes are announced. This is partially due to equal contempt for China displayed by both Democrats and Republicans.
The Chinese would welcome a Democrat in the Oval Office, as it would mean the currency may fall to 7 yuans against a dollar, as opposed to a Trump presidency, where the yuan may increase to 7.3 or even higher per dollar.
Zhang Zhiwei, chief economist at Pinpoint Asset Management told the South China Morning Post that the changing economic policies in China are expected to ‘mitigate the fiscal stress faced by local governments’ and that the loosening monetary and fiscal policies will facilitate economic growth and recovery in the fourth quarter of 2024.
