Daily Management Review

Amidst Ongoing Property Distress, China's Industry Activity Unexpectedly Declines


Amidst Ongoing Property Distress, China's Industry Activity Unexpectedly Declines
China's manufacturing production unexpectedly declined in May, reinforcing calls for further stimulus as the country's chronic property crisis continues to undermine investor, corporate, and consumer confidence. China is the world's second-largest economy.
The National Bureau of Statistics (NBS) said on Friday that the official manufacturing purchasing managers' index (PMI) fell to 49.5 in May from 50.4 in April. This figure fell short of experts' estimate of 50.4, which is the 50-point threshold that separates expansion from contraction.
This dismal figure compounds a string of recent statistics that indicates the $18.6 trillion economy is having difficulty recovering, undermining earlier hope raised by better-than-expected trade and production figures.
"I think the data particularly reflects soft domestic demand, the housing sector continued to worsen and retail sales were not strong," said Xu Tianchen, senior economist at the Economist Intelligence Unit.
"The May reading may indicate a temporary blip. We'll probably see an improvement in June as new government policies start to impact, such as the property rescue plan and the issuance of special sovereign bonds," he added.
While employment continued to decline, the PMI's sub-indices for new orders and new export orders both tilted back into contraction following two months of expansion.
According to the NBS non-manufacturing survey, the services sub-index increased from 50.3 in April to 50.5 in May. However, growth as measured by the more inclusive services index—which also includes construction—slowed in May, falling to 51.1 from 51.2 the previous month.
Property-related issues have hurt China's economy broadly and impeded Beijing's attempts to change its development model from one that relies mostly on debt-fueled investment to one that emphasises domestic consumption.
While new property prices dropped last month at their quickest rate in nine years, retail sales climbed at their weakest rate since December 2022, indicating that it is too soon to declare if the struggling economy has completely recovered.
The International Monetary Fund raised its growth projection for China by 0.4 percentage points to 5% in 2024 and 4.5% in 2025 on Wednesday, although it cautioned that the real estate market remained a significant growth risk.
This month, China announced "historic" moves to stabilise the real estate market, but experts argue that these actions are insufficient to support a long-term recovery.
The International Monetary Fund stated that there was "scope for a more comprehensive policy package to address property sector issues."
The drop, according to Nie Wen, an economist at Shanghai Hwabao Trust, strengthened the need for more assistance.
"There is still a need to strengthen stimulus on the demand side, while at the same time sorting the credit channels as soon as possible to avoid financial institutions' balance sheets shrinking, which would have a negative effect on the economy," Nie said.