China’s weak factory PMI raises pressure for consumer stimulus

China’s manufacturing activity sank to a six-month low in August as factory gate prices tumbled and owners struggled for orders, an official survey showed on Saturday, pressuring policymakers to press on with plans to direct more stimulus to households.

The National Bureau of Statistics purchasing managers’ index slipped to 49.1 from 49.4 in July, its sixth straight decline and fourth month below the 50 mark separating growth from contraction. It missed the median forecast of 49.5 in a Reuters poll.

After a dismal second quarter, the world’s second-largest economy lost momentum further in July, prompting policymakers to signal they were ready to deviate from their playbook of pouring funds into infrastructure projects, instead targeting fresh stimulus at households.

Sentiment remains gloomy among manufacturers as a years-long property crisis keeps domestic demand in the doldrums and Western curbs loom on Chinese exports such as electric vehicles.

Producers reported factory gate prices were their worst in 14 months, plunging to 42 from 46.3 in July, while the new orders and new export orders sub-indices remained firmly in negative territory and manufacturers maintained a hiring halt.

“The fiscal policy stance remains quite restrictive, which may have contributed to the weak economic momentum,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

“To achieve economic stabilisation, the fiscal policy stance needs to become much more supportive. With the U.S. economy slowing, exports may not be as reliable a source for growth as it was in the first half of the year,” he added.

Policy advisers are pondering whether Beijing may decide in October to bring forward part of next year’s bond issuance quota if growth does not show signs of bottoming out in the summer.

China made a similar move at the same time last year with stimulus that raised the deficit to 3.8% of GDP from 3.0% and frontloaded part of the 2024 local government debt quotas to invest in flood prevention and other infrastructure.

This time, however, analysts anticipate the authorities will seek to put a floor under depressed domestic demand.

Retail sales topped forecasts last month, apparently vindicating officials’ July decision to allocate around 150 billion yuan ($21 billion) China is raising through ultra-long treasury bonds this year towards subsidizing a trade-in scheme for consumer goods.

And the August reading of the non-manufacturing PMI, which includes services and construction, quickened to 50.3 from 50.2, allaying fears that it would also enter a period of contraction.

Still, economists are waiting on more specific plans to reinvigorate China’s 1.4 billion-strong consumer market beyond a pledge from the top-decision making body of the ruling Communist Party that it will do so.

It will not be easy.

“I’m not actually sure if more (stimulus) can be rolled out,” said Xu Tianchen, senior economist at the Economist Intelligence Unit, given the scale of the trade in scheme, which he said “would provide moderate support to the economy” and “seems to be welcomed by consumers.”

What is more, any effort to revive domestic demand will likely be ineffective unless further efforts are taken to alleviate a bruising slump in the property sector, which has weighed heavy on consumer spending over the past three years.

With 70% of household wealth held in real estate, which at its peak accounted for a quarter of the economy, consumers have kept their wallets tightly shut.

A Reuters poll on Friday forecast home prices will fall 8.5% in 2024, deeper than the 5.0% decline tipped in a May survey.

“I think officials will settle for something lower than 5% this year,” the EIU’s Xu said, referring to Beijing’s annual growth target.