INSIGHT: China Sept small-to-medium factories’ output shrinks on poor demand

SINGAPORE (ICIS)–Manufacturing output of China’s small to medium enterprises went back to into contraction mode in September, underscoring continued and widespread weakness in the world’s second-biggest economy.

• Caixin’s China Sept PMI falls to 49.3 from 50.4 in August
• More fiscal measures may be required
• Three big cities ease home-buying restrictions amid property slump

No immediate turnaround of the country’s weak economic conditions can be expected notwithstanding the slew of economic measures recently announced.

China’s manufacturing purchasing managers’ index (PMI) last month declined to 49.3, from 50.4 in August, according to a private survey conducted by Chinese private media group Caixin.

A PMI number below 50 indicates contraction.

The Caixin PMI surveys small and medium-sized enterprises (SMEs) and export-oriented enterprises located in eastern coastal regions, while the official PMI is tilted toward larger state-owned enterprises (SOEs).

The small and medium manufacturers are worse off since Caixin’s September PMI reading was below the official number of 49.8, which was an improvement from August’s 49.1.

In Caixin’s survey, the China’s September PMI reversed the expansion recorded in August.

For two months in the third quarter, factory output shrank, after managing to stay in expansionary mode since November 2023.

Production at big factories, on the other hand, has been indicating contraction for five straight months, based on official PMI reading.

“The market [in September] was characterized by diminished demand coupled with fierce competition,” Caixin Insight Group senior economist Wang Zhe said.

Delays in supplier logistics, low demand for manufacturer purchases, and increased inventories of both raw materials and finished goods affected overall production in September, Wang said.

“Across the board, the latest macroeconomic data have fallen short of market expectations,” the Caixin economist said.

Falling underlying demand, heightening competition and subdued market conditions were cited as reasons for the decline in incoming new orders for Chinese manufactured goods, according to Caixin.

“Softening economic conditions” overseas also negatively affected export orders, it added.

A good number of petrochemical producers and their downstream end-users fall under the SME category.

Reeling from continued demand weakness, some of these producers which have already been running at reduced capacity may have to cut output further.

Pre-holiday restocking turned out weaker than expected, with market outlook post-holiday remaining largely bearish.

Poor demand has kept China’s overall producers’ price index (PPI) in deflation territory for nearly two years

STIMULUS MEASURES BOOST SENTIMENT
Days before China went into a week-long National Day celebration, the People’s Bank of China (PBoC) announced a raft of measures, including lowering of interest rates on existing mortgages, to boost consumption.

On 26 September, the Politburo of the Communist Party of China pledged fiscal measures to complement the effective monetary policy easing by the central bank amid growing concerns that the country will fail to achieve its 5% GDP growth target this year.

The International Monetary Fund (IMF) revised up its growth forecast for the country in line with the government’s target in May, from 4.6% previously. It, however, warned of slower growth ahead considering China’s ageing population and slowed productivity expansion.

Although the financial and commodities markets in China surged after the measures were announced, consumer confidence is still weak, which will affect their spending power, analysts said.

A stimulus program, even if seemingly large, could have “a limited impact on growth”, according to analysts at Japanese brokerage Nomura.

More durable and impactful measures, including increased fiscal spending, are needed to boost China’s growth and address weak consumer and business spending.

Spending during the week-long holidays from 1 October will thus be a gauge as to how the economic measures will impact consumer spending, Singapore’s UOB Global Economics & Markets Research said in a note on 30 September.

In the same period in 2023, domestic tourism revenues totaled yuan (CNY) 753 billion ($107 billion), according to state news agency Xinhua.

PROPERTY MEASURES MAY BE INSUFFICIENT
Three large Chinese cities – Guangzhou, Shenzhen and Shanghai – eased house-buying restrictions on 29 September, according to Xinhua.

Guangzhou completely removed restrictions on home purchases, while non-Shanghai residents will be allowed to purchase suburban homes if they have paid social insurance or individual income tax in the city for at least a year, instead of three years.

Shenzhen also announced reduction in downpayment ratio and optimized district-specific home purchase restrictions.

China’s government hopes to tackle its years-long housing crisis via the fresh measures.

But China’s economic worries may not be solved with these measures alone, ICIS senior consultant John Richardson said.

Long-term challenges such as the end of the real-estate bubble and an ageing population will not be easily fixed with economic stimulus, he said in a blog post on 30 September.

“The extent to which [China] can maintain its dominant role in global exports is also in question because of a much more difficult geopolitical environment,” he said.

Insight article by Jonathan Yee and Pearl Bantillo

($1 = CNY7.02)

Thumbnail image: At a port in Lianyungang, Jiangsu Province, China, on 2 October 2024. (Costfoto/NurPhoto/Shutterstock)