China’s Sputtering Growth Engines Raise Urgency for Stimulus

China’s remaining growth engines are showing signs of spluttering while the property market continues to drag on the economy, highlighting the urgency of government intervention to keep an increasingly unlikely growth target in sight.

Factory activity contracted for a fourth straight month in August, with sub indexes showing deepening deflationary pressures. The latest sales figures showed a worsening residential slump, after China Vanke Co. — one of the nation’s biggest developers — underlined the industry’s woes late Friday by reporting a half-year loss for the first time in more than two decades.

Beijing has struggled to contain the property downturn and now faces the prospect of increasing protectionism and a shaky global outlook weighing on exports. Several rounds of measures aimed at reviving domestic demand have done little to reverse the retreat, endangering the government’s growth target and spurring economists to call for additional stimulus.

“We believe more fiscal easing is necessary to help secure the ‘around 5%’ full-year growth target,” Goldman Sachs Group Inc. economists including Yuting Yang and Andrew Tilton wrote in a note.

Year-to-date data show rising risks that revenues from tax and land sales will fall short of the budget projection this year, they wrote. That will weigh on government spending if there’s no upward revision to the official deficit target and no extra-budget quotas for government bond issuance.

What Bloomberg Economics Says...

“The economy will need more policy support to pull out of its extended period of weakness...Government spending will have to remain the key lever to lift aggregate demand when private demand is not forthcoming — and the pace needs to accelerate.”

— Chang Shu and Eric Zhu.

Economists at banks including UBS Group AG and JPMorgan Chase & Co. expect China will fall short of delivering on its growth target.

Adding to the gloom, the official manufacturing purchasing managers’ index declined to 49.1 from 49.4 in July, the National Bureau of Statistics said. The reading has been below the 50-mark separating growth from contraction for all but three months since April 2023.

Both the input-cost and output prices sub indexes declined in August.

In statement accompanying the PMI data, NBS analyst Zhao Qinghe attributed the latest contraction to high temperatures, heavy rainfall and a seasonal slackening of production in some industries. The non-manufacturing measure of activity in construction and services rose to 50.3, boosted by consumption during the summer holiday season, the statistics office said.

As trade tensions with the US and Europe increase, headwinds for the manufacturing sector are growing. For the mid-term outlook, much will depend on the outcome of the US election: Former President Donald Trump has argued for 60% tariffs on Chinese imports, while Vice President Kamala Harris’s China policies are expected to be more in line with President Joe Biden’s approach.

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On the property front, the latest data was also discouraging.

The value of new-home sales from the 100 biggest real estate companies fell 26.8% from a year earlier to 251 billion yuan ($35.4 billion), faster than the 19.7% decline in July, according to preliminary data from China Real Estate Information Corp.

At least 10 city governments have loosened or scrapped their new-home price guidance to let market demand play a bigger role, a move that is expected to drive more real estate companies to cut prices.

China is considering allowing homeowners to refinance as much as $5.4 trillion of mortgages to lower borrowing costs for millions of families and boost consumption, Bloomberg News reported Friday. While lower mortgage rates would hurt profitability at state-run banks, analysts say it might help the real estate sector.

“In essence, it’s a transfer of wealth from banks to households, so positive for consumption,” said Larry Hu, head of China economics at Macquarie Group Ltd. “But the size is too small to be a game changer, given the current consumption landscape in China, which is pretty dire.”

The growth headwinds have yet to result in a more forceful government response, with less than half of budgeted expenditure completed in the first seven months of 2024. On Friday, Finance Minister Lan Fo’an said the economy is still growing at a clip of 5%, describing its performance in the first half as “generally stable and progressing steadily.”

But economists are calling for more support, especially if external demand wanes.

“In the near term, we expect the PBOC to guide commercial banks to lower existing mortgage rates,” said Lu Ting, an economist at Nomura Holdings Inc. “For bolder stimulus measures, we think this is more likely to happen in the fourth quarter, when Beijing’s concerns over growth become more elevated.”