Factory production in China experiences continuous contraction for the fifth month in a row in August
China's economy is currently grappling with a series of challenges that threaten its growth target of "around 5 per cent" for 2025. The prolonged property slump, weakening exports, rising job insecurity, heavily indebted local governments, and extreme weather are some of the factors causing concern.
The slowing economic momentum in the third quarter is due to persistently weak domestic demand and a cooling property market. Urban unemployment edged up to 5.2% in July from 5% in June, reflecting the impact of these economic headwinds.
However, there are some positive signs. Analysts forecast the private sector RatingDog PMI to come in at 49.7, up from 49.5 a month prior. The data will be released tomorrow, offering a glimpse of the current state of the private sector.
Meanwhile, China's manufacturing activity shrank for the fifth consecutive month in August, as indicated by an official survey. The composite PMI of manufacturing and non-manufacturing, which includes services and construction, expanded at a slower pace, rising to 50.5 from 50.2.
Despite the contraction, there was a slight improvement in the official purchasing managers' index (PMI) for China, which rose to 49.4 in August from 49.3 in July. The non-manufacturing PMI index, on the other hand, expanded at a quicker pace, rising to 50.3 from 50.1.
One of the key concerns is the property sector, which is a key store of household wealth. Households' reluctance to take out mortgages was reflected in July bank lending data, which unexpectedly contracted for the first time in 20 years.
The decision by China's top court to ban firms and employees from skirting social insurance payments could lead to job losses, potentially affecting consumer spending further. However, this decision could also support cash-strapped local authorities in replenishing depleted pension coffers, as demands on public finances continue to grow.
Economist Zhiwei Zhang stated that the macro outlook for the rest of the year largely depends on the durability of exports and the potential for fiscal policy to become more supportive in the fourth quarter. The uncertainty caused by the ongoing tariff truce between the US and China is eroding confidence on both sides of the Pacific.
In a bright spot, China's exports in July beat forecasts, but the gain was supported by a low base and a surge in shipments to South-east Asia. However, the impact of extreme weather in China, which has caused US$2.2 billion (RM9.29 billion) of road damage since July 1, could potentially offset these gains.
As China navigates these challenges, policymakers are working to increase consumer subsidies in an effort to stimulate spending and support the economy. The coming months will be critical in determining the trajectory of China's economy and its ability to meet its growth target for 2025.
