Mixed Signals from China's Manufacturing Sector Prompt Calls for Economic Boost

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Last month, China's manufacturing industry showed conflicting signs about the economy, leading to calls for Beijing to take action to stimulate growth before an important meeting of the country’s leaders.

The official Purchasing Managers' Index (PMI) for large, state-owned manufacturers fell to 49.1 in February, a slight decrease from 49.2 in January, as reported by the National Bureau of Statistics. This marks the fifth consecutive month that the index has been below 50, indicating a contraction in the sector.

On the other hand, the Caixin manufacturing PMI, which focuses on smaller, private companies, increased to 50.9 in February from 50.8 in January, according to a survey by S&P Global. This marks the fourth consecutive month of expansion for the index.

Friday's information came right after China's leaders promised to reach economic growth goals for 2024 by encouraging domestic spending and supporting technology and innovation industries.

In the upcoming week, many representatives from all over China will meet in the capital for the yearly National People's Congress (NPC) session where the growth target for the year will be announced.

Goldman Sachs analysts suggested on Friday that the consistent gap between the two manufacturing PMIs over the past four months could indicate significant changes in the economy.

They pointed out that the variation in the output and new order sub-indexes may be due to the diverse geographical and sector focus of the surveys. The Caixin PMI, for example, includes more southern regions such as Guangdong and Zheijang, which are crucial export hubs.

Wang Zhe, a senior economist at Caixin Insight Group, stated that the manufacturing sector showed improvement in February, according to the Caixin PMI data.

He also mentioned that the economy is still facing challenges, as total new orders grew at a slower pace compared to output, prices remained low, and employment continued to decline.

Wang emphasized the need to assess the effectiveness of the measures announced by Beijing to boost growth. He also mentioned the importance of making additional efforts to enhance people's livelihoods and market expectations.

Last year, China experienced sluggish economic growth of 5.2%. According to the World Bank's latest forecast in December, growth is projected to further slow down to 4.5% this year.

Chinese leader Xi Jinping speaks at Beijing's Great Hall of People in October 2022.

Chinese leader Xi Jinping speaks at Beijing's Great Hall of People in October 2022.

The Communist Party's Politburo, the top decision-making body, met on Thursday to talk about the government work report for the upcoming NPC meeting.

The 24 members of the decision-making body, led by Chinese President Xi Jinping, have committed to achieving the annual economic and social development goals and tasks. This was stated in a report of the meeting released by state-owned Xinhua.

Moreover, the officials have restated their intention to enhance the current proactive fiscal policy, follow a cautious monetary policy, stimulate domestic demand, and promote technology and innovation sectors.

Analysts expect Beijing will unveil more details about the measures during next week’s NPC session.

“Fiscal policy will lead the way,” HSBC analysts said Friday.

"We anticipate that the overall fiscal deficit will be around 8% of GDP, with the official fiscal deficit at about 4% of GDP," experts mentioned. This could lead to an increase in local government bond issuance to support infrastructure investments.

Editor's P/S:

The conflicting signals from China's manufacturing industry paint a complex picture of the country's economic health. The official PMI for state-owned manufacturers indicates a contraction, while the Caixin PMI for private companies suggests expansion. This divergence raises questions about the effectiveness of government stimulus measures and the underlying health of the economy.

The upcoming National People's Congress will provide an opportunity for Beijing to unveil more details about its plans to boost growth. Analysts expect the government to unveil more details about the measures during next week's NPC session. The focus on fiscal policy and infrastructure investments is likely to be a major part of the discussion, as the government seeks to stimulate demand and support the economy. The effectiveness of these measures will depend on a variety of factors, including the global economic outlook and the ability of the government to implement them effectively.