China continues to face significant economic challenges, marked by a persistent decline in manufacturing activity and weakening domestic demand. Recent releases of purchasing managers’ indices (PMIs) and decisions by the Politburo of the Chinese Communist Party (CCP) highlight a difficult economic situation that requires thoughtful policy interventions to stimulate growth.
In July, Chinese manufacturing activity contracted for the third consecutive month. According to the official PMI indices, the manufacturing index remained below the 50 mark, at 49.4, indicating a contraction compared with the previous month. This reflects weak domestic demand, exacerbated by a persistent housing crisis and high unemployment. The services sector is also showing signs of stagnation. The non-manufacturing PMI barely held its ground in the growth zone, at 50.2, down from 50.5 in June. This general economic weakness is attributed to factors such as falling household confidence, a slow recovery in employment, and persistent structural problems in the real estate sector.
Faced with these challenges, the Chinese Politburo has expressed its intention to further support domestic consumption. At its recent meeting, the CCP stressed the need to raise household incomes and strengthen domestic demand. However, despite these intentions, no concrete measures have been announced, and skepticism persists as to the effectiveness of these initiatives without a clear and robust stimulus plan. The Chinese government has introduced targeted measures to encourage the purchase of goods such as automobiles and household equipment, but these efforts have not been sufficient to revitalize demand in any significant way. Moreover, budgetary constraints, such as high local public debt, limit Beijing’s ability to launch a major stimulus program.
The real estate sector, a pillar of the Chinese economy, remains a major source of concern. The government is seeking to accelerate the sale of unsold homes and complete construction work in progress. However, these measures have been deemed insufficient by many economists, who are calling for structural reforms to restore investor confidence and stimulate consumption.
Geopolitical tensions with the United States and the European Union add a further layer of complexity. The Biden administration is considering imposing new restrictions on semiconductor exports to China, which could hinder the country’s technological development and aggravate trade tensions.
Economic growth forecasts for 2024 remain uncertain, with an ambitious 5% target that many consider difficult to achieve without increased support for consumption and investment. The Politburo has stressed the importance of maintaining a stable currency and reducing financing costs, but the impact of these measures may be limited without a large-scale rate-cutting cycle. Efforts are also underway to diversify the economy by focusing on emerging industries such as electric vehicles and green energy. However, these sectors face problems of overcapacity that complicate their potential role in stimulating the economy.
Chinese economic indicators
Sources: Bloomberg, Richelieu Group
