China's Factory Activity Faces Continued Contraction

BEIJING (Reuters) – China's factory activity likely remained in contraction for the fifth consecutive month in September, impacted by weak domestic demand and rising global trade barriers.

A Reuters poll of 22 economists estimates that the official purchasing managers' index (PMI) will be 49.5, slightly up from August's 49.1, but still below the 50-point threshold separating growth from contraction.

The manufacturing sector mood remains depressed due to tumbling producer prices and dwindling orders. Recently, China's industrial profits plummeted 17.8% year-on-year in August, the most significant decline this year, contrasting with July's 4.1% growth.

This continued downturn emphasizes the necessity for bold government stimulus efforts as policymakers strive to meet China's 2024 growth target of around 5%. After a shaky start to the second half of the year, recent economic data has broadly missed expectations, suggesting persistent weakness.

An unusual September Politburo meeting concentrated on macroeconomic issues recognized that the economy is facing "new problems" and called for new policies to stimulate growth more vigorously. The meeting also pushed for efforts to halt the declines in the struggling property market and to allocate "necessary" fiscal spending.

These pledges arrived just two days after China announced its most aggressive stimulus package since the COVID-19 pandemic, highlighting officials' anxiety to reverse the economic downturn. The government is expected to issue around 2 trillion yuan ($285.16 billion) of special sovereign bonds to support consumption and alleviate local government debt, responding to economists' calls for more fiscal support.

China's economic recovery has relied heavily on strong exports; however, looming Western trade restrictions are complicating the outlook. The United States is set to impose significant tariff hikes on Chinese products, including electric vehicles (EVs), starting Friday, and the European Union is anticipated to make a decision on potential EV tariffs soon.

The private sector Caixin PMI is predicted at 50.5, according to analysts polled by Reuters. The official and Caixin manufacturing PMIs will be released on Monday.

($1 = 7.0135 Chinese yuan)