China’s Economy Stumbles in Sign Rebound Hinges on More Stimulus
Bloomberg News
6 min read
(Bloomberg) -- China’s economic activity unexpectedly faltered to start the year, breaking the momentum of a recovery sparked by stimulus measures and underlining the need for Beijing to do more to prevent another slowdown.
Factory activity shrank in January after three months of expansion, with the manufacturing purchasing managers’ index falling to 49.1, the lowest since August. The non-manufacturing gauge for construction and services dropped to 50.2, just above the 50-mark that separates growth and contraction.
The disappointment followed other official data showing the government’s fiscal support to the economy was weak last year. Industrial firms reported the third straight year of profit declines as deflation pressure persists, even though a program to subsidize purchases of consumer goods and machinery contributed to an earnings uptick in late 2024.
Taken together, the latest set of figures reveal the world’s No. 2 economy risks stalling unless the government stumps up more money — especially by way of public borrowing and spending — to plug a hole in demand.
“Without a more pro-growth stance on the monetary and fiscal policy fronts, it will be hard for China to prevent a sharper economic deceleration in 2025,” said Carlos Casanova, senior Asia economist at Union Bancaire Privee.
The urgency is only increasing as Donald Trump threatens to hit Chinese exports with tariffs, which would weaken overseas demand at a time when domestic consumers and private firms already favor caution. The embattled property sector meanwhile shows little sign of a sustained rebound.
The CSI 300 Index of onshore Chinese stocks swung between gains and losses, ending the day down 0.4% at the close. China’s 30-year government bond futures rallied 0.7%, while the yuan fell about 0.4% in both onshore and overseas trading.
China met the official growth target of 5% last year, thanks to a late policy blitz and a boom in exports. But the economy’s recovery has been uneven, with manufacturing at times a bright spot but consumption weighed down by a weak jobs market and a prolonged real estate crisis.
Authorities have pledged to adopt more supportive fiscal and monetary policies this year with a wider budget deficit ratio alongside interest-rate cuts. But doubts remain over whether Beijing’s actions will be bold enough to end China’s deflationary spiral. So far, the central bank has prioritized stabilizing the yuan over monetary easing, in what could indicate a moderation of concern about growth on the part of officials.
Speaking on Monday, President Xi Jinping vowed to strengthen the economic recovery and said China plans to deepen its reforms.
While factory activity typically cools before the Chinese New Year period as production winds down when millions of workers travel to their hometowns, economists said the slowdown this month was more severe than usual, adding to signs of weakness despite recent efforts to boost the economy.
“The extent of decline is beyond our expectation,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd, adding that a stronger fiscal policy and a cut to the reserve requirement ratio for banks are still on the table. “The economy is far from recovering.”
The PMI figures released Monday by the National Bureau of Statistics are the first official data available each month to offer insights into the health of the Chinese economy, which is struggling to overcome the twin challenge of weak domestic demand and growing trade headwinds.
What Bloomberg Economics Says...
“The first major read on China’s economy at the start of 2025 is alarming — growth lost momentum even after intensified stimulus toward the end of last year ... The surprisingly weak PMIs underline the urgency for stronger policy support. We see it coming, with monetary easing likely to be the key tool of choice in February.”
— Chang Shu and Eric Zhu
Read the full note here.
Both production and new orders fell to a five-month low, according to the PMI data. In a sign of weak global demand, new export orders dropped to the lowest since February.
Manufacturing was “affected by the approaching Spring Festival holiday and the concentrated return of employees to their hometowns,” Zhao Qinghe, senior statistician at the NBS.
While factory activity slowed in part because of the eight-day New Year break, it could also mean exports benefited less than anticipated from a front-loading of orders by businesses as part of an effort to dodge any new tariffs, according to Zhiwei Zhang, chief economist at Pinpoint Asset Management.
Steep US levies could hurt China’s exports, which made up nearly a third of growth last year, and add to costs for manufacturers already facing price pressure from intense competition and sluggish consumer sentiment. Trump has so far refrained from imposing tariffs on China in his first days in office, although his plans remain unpredictable.
Fiscal Support
China’s fiscal support to the economy was limited in 2024, held back by local governments’ plunging income from land sales and a broad decline in tax revenue.
Last year’s increase in expenditure was about 2 trillion yuan ($275 billion) less than Beijing had forecast, largely as a result of underspending by local government infrastructure funds.
Provincial governments earn a big portion of their revenue from selling land to developers — a source of income that’s dried up over the past few years and forced regional officials to cut their expenditure, undermining the fiscal boost to the economy.
Broad fiscal spending by central and local governments under their two main budgets, which covers everything from day-to-day expenses to infrastructure projects, has grown by only 1.5% on average each year since 2021. That’s a fraction of the 11% annual growth seen in the five years prior, and shows the extent to which the real estate crisis emptied state coffers.
The Finance Ministry’s pledge to expand outlays this year will need to be backed with actual money to ensure that governments across the country have the necessary resources to spend what they promise. Lifting the official fiscal deficit ratio to 4% of GDP from last year’s 3% would translate into a 5 percentage point increase in spending from the main budget, according to economists at Huachuang Securities Co.
Public spending prioritized infrastructure over social welfare last year. That should change as top leaders have signaled a greater policy focus on consumption in 2025, according to Michelle Lam, Greater China economist at Societe Generale SA.
“The PMI, of course, has made fiscal stimulus an even more important priority as the recovery has remained fragile,” she added.
--With assistance from Tian Chen and Zhu Lin.
(Updates stocks in seventh paragraph, adds Xi’s comments in 10th. A previous version corrected manufacturing PMI forecast.)
