China factory activity improves in Aug, measures to boost economy ramped up

China’s manufacturing sector strengthened in August despite persistently weak export orders, with domestic consumption expected to continue supporting the country’s factory activity in the near term.

Caixin’s China manufacturing purchasing managers’ index (PMI) rose from 49.2 in July to above the neutral 50.0 threshold at 51.0 in August, signaling a fresh improvement in the health of the sector, which has strengthened in three of the past four months.

“In August, the manufacturing sector showed overall improvement. Apart from sluggish exports, the gauges for supply, total demand, and employment were all in expansionary territory,” said Wang Zhe, a senior economist at Caixin Insight Group.

“Overseas demand continued to drag on performance. Although the reading for new export orders rebounded, it was still well below 50, as the growing risk of recession in major economies subdued China’s external demand,” Wang said.

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.

The improvement in the Caixin PMI mirrors China’s official PMI which rose further to 49.7 in August from 49.3 in July.

The reading was the highest in five months, but it also marked the fifth straight month of contraction, defined as a reading below 50.

The improvement can be attributed to stronger production (51.9 from 50.2 in July), new orders (50.2 from 49.5 in July) and new export orders (46.7 from 46.3 in July) but employment (48.0 from 48.1 in July) remained on a weakening trend.

“Although new export orders picked up, it was still deep in the contraction territory in August which continued to point to a weak external demand outlook,” said Ho Woei Chen, an economist at Singapore based UOB Global Economics & Markets Research.

China’s official non-manufacturing PMI fell a sharper-than-expected 0.5 points to 51.0 in August, marking the fifth consecutive month that the reading has eased lower but nonetheless, it managed to remain in the expansion territory since the start of the year, Ho said.

“Outlook for the services sector has further deteriorated but an improvement in manufacturing may be able to provide some offset. Having said that, employment remained weak for both services and manufacturing in August,” she said.

CHINA RAMPING UP ECONOMIC SUPPORT

China has been introducing measures to support its economic recovery amid a severe property sector downturn and weak household consumption.

On 1 September, the People’s Bank of China (PBoC) announced for the first time this year a reduction of the amount of foreign currency deposits banks are required to hold as reserves.
The move followed right after support measures for the property sector and the plans to expand tax breaks for child and parental care and education.

In the details, financial institutions in China will need to carry just 4% of their foreign exchange deposits in reserve starting 15 September, the PBoC said, from current level of 6%, to increase the supply of foreign currency available in the local market, making it relatively more appealing for traders to buy the yuan.

In the property market, Beijing and Shanghai lowered mortgage requirements on 1 September for some homebuyers following guidance from the central government.

Both cities will no longer disqualify people who have previously had a mortgage from being considered first-time homebuyers as long as they are not owning any property.

On the tax front, China announced on 31 August an increase personal income tax deductions for childcare, parental care and children’s education spending, the latest steps to address the country’s changing demographics and boost household consumption.
Source: ICIS by Nurluqman Suratman, https://www.icis.com/explore/resources/news/2023/09/04/10921556/china-factory-activity-improves-in-aug-measures-to-boost-economy-ramped-up/