In May, China experienced a sharper-than-anticipated slowdown in factory output, indicating increased difficulties for an economy already struggling with a prolonged downturn in its property sector, as revealed by a recent official survey on Friday. The manufacturing purchasing managers’ index, provided by the China Federation of Logistics and Purchasing, dropped to 49.5 from April’s 50.4, on a scale where 50 signifies the threshold between growth and decline.
The slowdown primarily stemmed from a reduction in production levels. A decrease in both new and export orders hinted at weakening demand. Contrary to analysts’ expectations, which predicted the manufacturing PMI to remain just above 50, indicating continued expansion following a stronger-than-anticipated 5.3% annual growth rate in the first quarter, the index fell below the expansion threshold.
The growing uncertainty over trade with the U.S. market, exacerbated by the trade policies of President Joe Biden and his electoral competitor, former President Donald Trump, who both advocate for maintaining or increasing substantial tariffs on Chinese imports, may contribute to this downturn.
Zichun Huang from Capital Economics noted, “The decline in new and export orders could signal a near-term drop in exports, likely influenced more by the sentiment surrounding Biden’s new tariffs.”
China has recently eased down-payment requirements and reduced minimum interest rates on certain mortgages to stabilize the housing market. This comes after a period in which housing prices fell, construction activity froze, and numerous developers defaulted on their loans following a government crackdown on excessive borrowing.
The survey noted a slight deceleration in construction activity. With a significant portion of Chinese families’ wealth tied up in real estate, the extended slump has severely affected the market. Job losses exacerbate the situation due to the pandemic and tighter regulations on tech businesses, further dampening consumer spending.
Many analysts emphasize the need for more comprehensive reforms to boost consumer confidence and ensure sustainable long-term growth. The International Monetary Fund recently upgraded its growth projection for China’s economy to 5% for the year but cautioned that a shift away from export and construction investment dependency is necessary, especially as the population ages.
Huang predicts, “Increased fiscal support and new incentives in the property sector could lead to a short-term resurgence in activity. However, the persistence of these measures is likely to be challenged by the structural issues facing the economy.”