By Ellen Zhang, Ryan Woo

Economic Overview

BEIJING (Reuters) – China's factory activity shrank for a fifth straight month, and the services sector sharply slowed in September. This trend indicates that more stimulus is necessary for Beijing to reach its 2024 growth target with only three months left in the year.

Purchasing Managers' Index (PMI)

The National Bureau of Statistics (NBS) released the purchasing managers' index (PMI) on Monday, which nudged up to 49.8 in September from 49.1 in August. Despite this increase, it remains below the 50-mark that separates growth from contraction, although it outperformed a median forecast of 49.5 in a Reuters poll. This reading marks the highest level in five months.

Economic Challenges

Coupled with a dismal private-sector Caixin survey and weak service PMIs, data reveals persistent challenges in China's factory and consumer activity. Policymakers have acknowledged that the economy faces new problems and are calling for more robust stimulus responses.

Last week, authorities introduced their most aggressive stimulus package since the COVID-19 pandemic, which contributed to China's stocks achieving their best weekly performance in nearly 16 years. Markets continued to rally on Monday.

Economists observe some positive signs for manufacturing from the PMIs, but it's uncertain if last week’s significant policy announcements—such as eased property curbs in major cities—will suffice for a recovery. Zhiwei Zhang, chief economist at Pinpoint Asset Management, emphasized that these city policies are of minor importance and that fiscal policy is crucial to addressing macroeconomic challenges.

Housing Market Support

On Sunday night, the central bank and top financial regulators unveiled broader measures to support the housing market, including mandates for banks to lower mortgage rates for existing home loans by October 31.

Service Sector Status

Analysts anticipate that the stimulus and a reported new 2 trillion yuan (approximately $285.20 billion) bond package may help achieve Beijing's stated growth target of around 5%. However, challenges remain with weak demand and an increasingly hostile global trade environment.

Signs of enduring consumer weakness were underscored in the latest readings, with the official services PMI dropping to 49.9 in September, marking the first contraction since December last year. Meanwhile, the Caixin services PMI also indicated slower activity in the sector. Zhao Qinghe, statistician at the NBS, attributed the decline in the services PMI to the end of the summer holiday travel peak and extreme weather conditions in some regions.

The official construction PMI rose to 50.7 from 50.6 the previous month.

Government Initiatives

According to reports, 1 trillion yuan to be raised via special bonds will be directed towards increasing subsidies for a consumer goods replacement program and business equipment upgrades. China also intends to generate another 1 trillion yuan through a separate special debt issuance aimed at assisting local governments with their debt issues.

Officials noted that the existing program has already bolstered sales in the auto sector, home appliances, and home decoration products.

As the property downturn impacts the broader economic recovery, prominent leaders at a recent Politburo meeting called for efforts to stabilize the housing market. Major cities like Shanghai and Shenzhen plan to ease significant home purchase restrictions in the coming weeks, adding to several smaller cities that have already done the same. On Sunday, Guangzhou lifted all home purchase constraints.

"Attention now shifts to the equity market, particularly regarding property sales and consumer behavior during Golden Week," remarked Zhou Hao, chief economist at Guotai Junan International. Chinese households are set to usher in the seven-day Golden Week holidays starting Tuesday.

($1 = 7.0146 Chinese yuan)