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China Dec factory contraction deepens, more stimulus on the cards

China Dec factory contraction deepens, more stimulus on the cards

BEIJING (Reuters) – China’s manufacturing activity contracted for the third consecutive month in December and weakened more than expected, dimming the country’s economic recovery prospects and raising the case for further stimulus measures to the new Year.

The government has introduced a series of policies in recent months aimed at supporting a weak post-pandemic recovery, held back by a severe real estate crisis, local government debt risks and weak global demand. But the world’s second largest economy is still struggling to gain ground.

The official Purchasing Managers’ Index (PMI) fell to 49.0 in December from 49.4 the previous month, an official factory survey showed on Sunday, below the 50 mark separating growth and contraction and weaker than the median forecast of 49.5 in a Reuters poll.

“We need to step up policy support, otherwise the trend of slowing growth will continue,” said Nie Wen, an economist at Hwabao Trust. Nie expects the central bank to reduce interest rates and banks’ reserve requirement ratios (RRRs) in the coming weeks.

“The fall in prices has significantly affected corporate profits and further affected people’s employment and income. We could see a vicious circle,” he said.

China’s central bank said on Thursday it would step up policy adjustments to support the economy and promote a rebound in prices, amid signs of growing deflationary pressures.

Earlier this month, China’s top leaders, at a key meeting aimed at charting the economic path for 2024, pledged to take more steps to support the recovery next year.

Five of China’s largest state banks lowered interest rates on some deposits on Dec. 22, the third round of such cuts this year, which could help the central bank ease monetary policy.

Consumer prices in China fell the fastest in three years in November while factory gate deflation deepened, weighed down by weak domestic demand.

The new orders subindex stood at 48.7, down for the third month, according to the PMI survey released by the State Bureau of Statistics.

Weak external demand remained a major drag on industrial activity, with the index of new export orders recording 45.8 in December, down for the ninth consecutive month.

The ex-factory price subindex stood at 47.7, down for the third consecutive month, adding to signs of deflation and pressure on corporate profits.

The official non-manufacturing Purchasing Managers’ Index (PMI), which includes services and construction, rose to 50.4 from 50.2 in November, supported by a recovery in the broad services sector.

China’s economic growth is expected to reach the official target of around 5% this year and Beijing is expected to maintain that target next year.

(Reporting by Liangping Gao and Kevin Yao; editing by Sam Holmes and Kim Coghill)

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