The latest economic activity data in China showed a limited improvement in the manufacturing sector during August, but it was not enough to get factories out of the contraction zone, while the services sector remained remarkably weak, which reinforces fears that the recovery in the second largest economy in the world is still unbalanced and depends largely on exports and technology-related industries.
The official manufacturing PMI rose to 49.8 points in August from 49.2 points in July, beating economists' average expectations of 49.6 points. However, the index remained below the 50-point level that separates growth from contraction, which means that the factory sector is still declining, albeit at a slower pace. Official data showed an improvement in demand and production, with the sub-indices for new orders and production returning to levels exceeding 50 points, a positive development that indicates that some companies are beginning to see an improvement in business flows. But the picture becomes less optimistic when looking at non-industrial sectors. The Purchasing Managers' Index for services and construction settled at 49 points, the weakest level since December 2022, which confirms that domestic demand has not regained its momentum.
Lin Song, chief economist for the Greater China region at ING Bank, said that the weakness of services carries an important significance because the sector depends mainly on the local market, which means that the behavior of households and companies is still cautious. She added that the August data suggest a new month of slow domestic activity, with limited prospects for a strong recovery in the near term.
This discrepancy explains a large part of the current nature of the Chinese economy. Sectors linked to export and advanced technology, especially equipment and artificial intelligence, perform better than sectors that depend on the domestic consumer. According to the data, the purchasing managers' indexes for equipment manufacturing and high-tech manufacturing exceeded 51 points, while consumer goods industries and energy-intensive sectors remained in the contraction zone.
Xu Tianchen, chief economist at the Economics Research Unit, said that domestic demand appears to be improving, but he suggested that this improvement was driven more by artificial intelligence and exports than by a strong expansion in government policies.
As for Qiu Zhang, President and Chief Economist at Pinpoint Asset Management, he considers it too early to conclude that the economy has entered a phase of real recovery. Other indicators confirm this caution. Consumption of goods and industrial production slowed at the beginning of the second half of the year, while investment in fixed assets continued to decline. The real estate market is still searching for a bottom after more than five years of recession, putting pressure on household wealth, consumer confidence, and corporate investments.
In contrast, exports remained a major driver of growth. Strong demand for products related to artificial intelligence has supported shipments of advanced technology and raised the prices of some goods manufactured in China. But reliance on exports in turn creates new risks, especially with the escalation of trade tensions and fears in the United States and Europe about China’s surplus production capacity.
The strength of export sectors is also not transmitted equally to the rest of the economy. Companies that depend on domestic demand face pressure on profits, which is reflected in the growth of industrial profits as a whole.
Pressure on policymakers is increasing as growth slowed to 4.3 percent during the second quarter, the weakest rate in more than three years. Chinese leaders pledged in July to launch additional measures to support the economy, while accelerating spending on infrastructure projects already included in the budget.
The Ministry of Finance also expanded loan interest subsidy programs for small private businesses and consumers, in an attempt to reduce the cost of financing and stimulate demand. But these measures alone may not be enough.
ING believes that the impact of interest support may be relatively limited, and it is likely that additional steps will be introduced in the coming weeks. At the same time, the People's Bank of China did not provide clear signals of an imminent cut in interest rates or the required reserve ratio for banks, reflecting caution in using traditional monetary stimulus tools.
Zhang Liqun, an analyst at the China Federation of Logistics and Procurement, believes that the continuation of the manufacturing index below the 50-point level means that business confidence is still unstable, calling for strengthening government investment in public services to help increase orders and support activity. However, Beijing does not appear ready to return to the massive stimulus model it has used in previous crises. The People's Daily newspaper confirmed that China is not overly dependent on strong stimulus, and that it is still able to achieve its annual growth target.
