China’s factories send mixed signals about the economy, pressing Beijing to do more

Mixed Signals from China’s Manufacturing Industry: Contraction in Large-Scale Sector vs. Expansion in Private Companies

China’s manufacturing sector presented conflicting signals last month regarding the overall health of the economy, leading to renewed calls for more proactive measures from Beijing to support growth. The National Bureau of Statistics reported a decline in the official Purchasing Managers’ Index (PMI) for large, state-owned manufacturers to 49.1 in February, down from 49.2 in January.

This fifth consecutive month of contraction below the 50-mark threshold for these enterprises signaled a challenging business environment for this sector. However, a different picture emerged from the Caixin manufacturing PMI, which focuses on smaller, private companies. According to S&P Global, this index rose to 50.9 in February, up from 50.8 in January.

Two Different Perspectives on China’s Manufacturing Sector

The discrepancy between the two manufacturing PMIs for four consecutive months may be indicative of structural shifts in the economy, according to analysts at Goldman Sachs.

Geographic and Sector Coverage: A Possible Explanation

One possible explanation for this divergence lies in the geographic and sector coverage of each index. The Caixin PMI covers more southern regions of China, where significant export hubs are located in Guangdong and Zhejiang.

Continued Improvement but Challenges Ahead

According to Wang Zhe, senior economist at Caixin Insight Group, the manufacturing sector showed improvement in February overall. However, challenges persisted as total new orders grew more slowly than output, prices remained subdued, and employment continued to contract.

China’s Economic Growth: Current State and Future Expectations

China’s economy experienced sluggish growth of 5.2% in 2022, and it is anticipated to slow further to 4.5% this year according to the World Bank’s most recent forecast.

China’s Top Leadership: Renewed Commitment and Upcoming National People’s Congress

Ahead of the annual session of the National People’s Congress (NPC), China’s top leadership pledged to meet economic growth targets for 2024 by focusing on domestic demand, technology, and innovative industries.

Anticipated Measures to Boost China’s Economy

During the upcoming NPC session, Beijing is expected to unveil more details about the measures designed to support economic growth. Analysts believe that fiscal policy will lead the way and anticipate a broader-based fiscal deficit of approximately 8% of GDP and an official fiscal deficit of about 4%. This could result in increased local government bond issuance to finance infrastructure spending.

The Importance of Addressing Challenges and Maintaining Market Expectations

“Further efforts may be required to improve people’s livelihoods and market expectations,” Wang stated, emphasizing the need for effective implementation of previously announced measures and potential new initiatives.