Chinese factory activity expands for first time in six months

Chinese factory activity strengthened for the first time in six months in October, in a heartening signal for policymakers as they prepare a crucial fiscal package to support the world’s second-largest economy.

 The figures represent the last data release before a meeting next week of the standing committee of China’s rubber-stamp parliament, the National People’s Congress, which is expected to confirm the size of a fiscal stimulus aimed at boosting flagging economic growth. 

This month’s official purchasing managers’ index came in on Thursday at 50.1, higher than 49.8 in September and stronger than the average forecast of 49.9 by analysts polled by Bloomberg.

Domestic consumption

 A reading above 50 marks an expansion from the previous month. The non-manufacturing PMI was 50.2 in October, slightly below analysts’ forecasts of 50.3 but also exceeding September’s reading of 50, as underlying domestic consumption remained weak. 

Analysts said the stronger reading reflected the first phase of Beijing’s stimulus efforts, which kicked off in September with monetary policy measures including interest rate cuts and support for the stock market.

 The package sent China’s benchmark CSI 300 share index soaring. Next week’s announcement is expected to concentrate on fiscal support. “On the whole, we expected readings to improve in October thanks to the monetary stimulus injection helping a bit,” said Heron Lim, an economist at Moody’s Analytics.

 While the monetary policy package may have helped boost output, analysts said the fiscal phase of support would be more important. They estimate that China needs to spend up to Rmb10tn ($1.4tn) over three years to restore confidence among domestic consumers, whose wealth has been hit by a deep property sector slowdown and job and salary cuts. 

Analysts also said there were warning signs of a deteriorating outlook for exports, which have helped to sustain China’s economic growth this year. New export order activity hit an eight-month low of 47.3 in October, the official data showed. 

“We’ll need to see if the stimulus rollout can lead to a recovery of domestic demand to offset [the] potentially softer external demand picture, which could be even less favourable if we do see a [Donald] Trump victory [in the US presidential election] next week and a subsequent escalation of tariffs,” Lynn Song, chief economist for greater China at ING, wrote in a note.

Fixing balance sheets 

China’s economy grew 4.6 per cent year on year in the third quarter, short of the official full-year target of 5 per cent. Many believe the government plans to direct most of next week’s fiscal stimulus package to fixing local governments’ balance sheets through debt swaps, as well as providing funds to buy land and unsold apartments to put a floor under the slumping property market. 

A large number of China’s local governments depend on property sales for revenue and have been devastated by the sector’s three-year slowdown. Recommended Angela Zhang Local government has become a chokehold for Chinese business But economists have said swapping existing local government debt for new debt would not amount to stimulus because it would not involve more spending. 

Commenting on a Reuters report this week that Rmb6tn of the planned stimulus would be in the form of local government debt swaps, Nomura economist Ting Lu said this “would not represent any incremental borrowing and could not be considered stimulus”. 

The package is also expected to include measures aimed at recapitalising large state banks. Chi Lo, senior market strategist at BNP Paribas Asset Management, noted that Beijing had “multiple policy goals beyond sustaining economic growth”, including “implementing structural reforms and reducing financial risk”. The government, he added, “has no target for fiscal spending”.