By Joe Cash

BEIJING (Reuters) – China’s manufacturing activity barely grew in December, though services and construction recovered, according to an official survey released on Tuesday. This suggests that policy stimulus is starting to penetrate some sectors as the economy prepares for new trade risks.

The National Bureau of Statistics (NBS) purchasing managers’ index (PMI) decreased to 50.1 in December from 50.3 a month earlier, remaining above the crucial 50-mark that separates growth from contraction but falling short of the median forecast of 50.3 from a Reuters poll.

China’s $18 trillion economy continues to struggle with recovery from the pandemic, suffering from weak consumption and investment alongside a prolonged property crisis. Nevertheless, policymakers are optimistic that recent fiscal and monetary measures will revitalize the property market, which has been dragging down the broader economy.

Improved domestic demand may benefit manufacturers even in the face of a global economic slowdown, thus mitigating the effect of U.S. President-elect Donald Trump’s proposed new tariffs on Chinese goods.

“The worst part of overcapacity seems to be over, businesses are receiving more orders,” stated Xu Tianchen, senior economist at the Economist Intelligence Unit. “However, there is a high risk of activity slowing again if stimulus subsides.”

“The bottom line is the stimulus needs to be sustained.”

The new orders sub-index of the manufacturing PMI rose to 51.0 this month, marking an eight-month high, up from 50.8 in November. However, new export orders, employment, and factory gate prices sub-indices remained in negative territory, according to the NBS.

Mixed data on industrial output and retail sales for November suggests a difficult path for Beijing towards stable economic recovery in 2025. Government advisers recommend maintaining a growth target of around 5.0% for the next year and increasing consumer-focused stimulus.

The non-manufacturing PMI, encompassing construction and services, increased to 52.2 this month, recovering from a stagnation at 50.0 in November. The NBS attributed this uptick to growth in financial services, telecommunications, and travel.

Following the data release, China’s blue-chip CSI300 index fell 0.6%, while Hong Kong’s Hang Seng rose by 0.35%.

KEEP STIMULUS COMING

Analysts at Nomura cautioned against assuming that support measures, like consumer goods trade-in schemes and easing of property purchase restrictions, were sufficient for achieving long-term economic stability.

“The surge in purchases of durable goods might face notable payback effects. Additionally, the property sector has yet to recover due to the debt burdens from distressed developers,” they noted, also warning that Trump’s potential return to the White House poses risks for Chinese exporters.

Trump has promised a 10% tariff on Chinese goods, intending to compel Beijing to stop the trafficking of Chinese-made chemicals used in fentanyl production. He also threatened tariffs exceeding 60% on Chinese goods during his campaign, representing a significant growth risk for the world’s top goods exporter.

At a policy-setting meeting earlier this month, officials committed to increasing the budget deficit, issuing more debt, and loosening monetary policies to support economic growth.

The World Bank recently raised its growth forecasts for China in 2024 and 2025 but cautioned about the impacts of low household and business confidence, as well as ongoing challenges in the property sector, which constituted around a quarter of the economy at its peak in 2021.

The upcoming private sector Caixin factory survey, set to release on Thursday, is anticipated to show an increase to 51.7.

China’s official December composite PMI, incorporating both manufacturing and services activity, climbed to 52.2 in December from 50.8 in the previous month.

“Increased policy support toward the end of the year has clearly provided a near-term boost to growth,” remarked Gabriel Ng, assistant economist at Capital Economics.

“However, this boost is unlikely to last more than a few quarters, given Trump’s tariff threats next year and ongoing structural imbalances that continue to affect the economy.”