China’s manufacturing activity crashed in October, posting numbers far lower than the slight dip many outside observers expected.
Construction activity slowed as well, pointing to continued structural weakness in the Chinese economy – specifically, the weakness that Chinese consumer spending is not rebounding as quickly as the regime in Beijing expected after the end of brutal coronavirus lockdowns.
The index of manufacturing purchases published by China’s National Bureau of Statistics fell to 46.5 in October, signaling an outright contraction in the sector. The index stood at 50.2 in September, the first increase after five months of contraction, and was expected to slip only to 50.1.
The index for non-manufacturing purchases fell to 50.6 from 51.7, also a much steeper decline than analysts anticipated.
“The unexpected decline of manufacturing PMI shows recovery in China is a bumpy road, as domestic demand is still quite weak,” Pinpoint Asset Management president and chief economist Zhang Zhiwei told the South China Morning Post (SCMP) on Tuesday.
“I think the government is likely to raise the fiscal deficit next year and aim for a sustained economic recovery. Meanwhile, the policies in the property sector need to be fine-tuned to avoid further damage to the economy,” Zhang said.
Chinese officials claimed the manufacturing decline was caused by an extended “Golden Week,” a holiday in early October that is traditionally a major shopping and travel event. Golden Week was a massive disappointment this year, as big-ticket sales like home and car purchases fell and the cost of living index soared. Bumps in travel spending and smaller consumer purchases came in far lower than the Chinese government expected.
The slowdown in construction was especially troubling because China’s real-estate industry plans on brisk sales in September and October, building promotional campaigns around the Golden Week mid-autumn holiday. Desperate to goose the dismal real estate market during this year’s festival season, the Chinese government tweaked regulations in August to make home-buying easier and less expensive, but home sales did not perk up as expected.
“Up until this latest data release, things were looking better,” Julian Evans-Pritchard of Capital Economics told the Financial Times (FT) on Tuesday.
Evans-Pritchard noted the data from October was “the worst on record, if you ignore Covid lockdowns.”
Bloomberg News on Monday laid the blame for the slowdown on Xi Jinping’s economic policies, interpreting the weak consumer demand numbers as poor results on a public opinion poll that China’s dictator will never have to face.
In short, Xi saw a need to shift China’s economy away from reliance on its property sector, but he made that decision just as his manufacturing sector was “losing its edge” and foreign firms were shifting to alternatives like Vietnam and Mexico as part of their “de-risking” strategies. U.S. sanctions and export controls have thwarted Xi’s plans to replace real estate revenue with high-tech manufacturing exports.
Xi’s approach also “ruffled too many feathers” in both Communist Party circles and the private sector, as in the case of real-estate reforms that wound up choking off the revenue stream for local governments that were highly dependent on land sales for income.
“Provinces have cut civil servant pay, including for school teachers, thereby denting morale. The poorest regions are lobbying for a central government bailout, with veiled threats of bond defaults,” Bloomberg noted.
“China has no approval ratings polls and social media is heavily censored, so we don’t have an accurate measure of Xi’s popularity. But we have a sense. Given the high homeownership and that more than one in five young people are jobless, many can’t be too happy right now,” the article surmised.
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