China's Factory Activity Expands at Fastest Pace in a Year

The recent surge in China's factory activity, as indicated by the Caixin China General Manufacturing PMI reaching 50.1 in January 2025, marks the fastest pace of expansion in a year. This growth, driven by increased output and new orders, particularly in manufacturing sectors such as computer and communication, non-ferrous metal smelting, and electrical machinery and equipment, signals a robust recovery in the manufacturing sector. However, this expansion raises critical questions about China's broader economic goals and the sustainability of its growth model.

The current expansion in factory activity is a stark contrast to the contraction observed during the Great Recession in 2008, when the China PMI saw a steep drop due to worries from the US spreading to the Chinese manufacturing sector. The PMI value in November 2008 was significantly lower than the current levels, indicating a more severe contraction in manufacturing activity. Furthermore, the current expansion is also different from the period in 2023, when the PMI values fluctuated around 49, indicating a shrinking manufacturing economy. For example, the PMI value in August 2023 was 49.70, and in December 2023, it was 49.00, both below the 50 threshold that signifies expansion.

The current acceleration in factory activity is also supported by the growth in industrial production. China’s industrial production grew by 6.2% year-over-year in December 2024, surpassing market estimates and the growth rate of 5.4% in November. This growth was mainly supported by faster rises in manufacturing, which increased by 7.4% compared to 6.0% in November. Within manufacturing, several sectors saw notable increases, including computer and communication (8.7%), non-ferrous metal smelting (9.7%), and cars (17.7%). This growth in industrial production further validates the acceleration in factory activity observed in the PMI data.

However, the current expansion in factory activity does not fully align with China's broader economic goals. The data shows that while manufacturing is growing, it is still a significant component of China's GDP, accounting for 36.5% in 2024, compared to 56.8% from services. This indicates that China is still heavily reliant on manufacturing, which may hinder its transition to a more service-oriented economy. Additionally, the expansion in factory activity does not directly address China's goal of reducing carbon intensity. The growth in manufacturing sectors such as non-ferrous metal smelting and coal mining suggests that China's industrial production is still heavily reliant on carbon-intensive industries. This is supported by data showing that China accounts for nearly a third of annual global carbon dioxide emissions and 30 percent of the world's greenhouse gas emissions. Therefore, while the current expansion in factory activity may contribute to short-term economic growth, it does not fully align with China's long-term goals of transitioning to high-value services and reducing carbon intensity.

The current expansion in factory activity also raises questions about the sustainability of China's growth model. The growth in manufacturing sectors such as non-ferrous metal smelting and coal mining suggests that China's industrial production is still heavily reliant on carbon-intensive industries. This is supported by data showing that China accounts for nearly a third of annual global carbon dioxide emissions and 30 percent of the world's greenhouse gas emissions. Therefore, while the current expansion in factory activity may contribute to short-term economic growth, it does not fully align with China's long-term goals of transitioning to high-value services and reducing carbon intensity.

The current expansion in factory activity also raises questions about the sustainability of China's growth model. The growth in manufacturing sectors such as non-ferrous metal smelting and coal mining suggests that China's industrial production is still heavily reliant on carbon-intensive industries. This is supported by data showing that China accounts for nearly a third of annual global carbon dioxide emissions and 30 percent of the world's greenhouse gas emissions. Therefore, while the current expansion in factory activity may contribute to short-term economic growth, it does not fully align with China's long-term goals of transitioning to high-value services and reducing carbon intensity.

In conclusion, the current expansion in China's factory activity, while a positive sign for short-term economic growth, raises critical questions about the sustainability of China's growth model and its alignment with broader economic goals. China must address the challenges of transitioning to high-value services and reducing carbon intensity if it is to achieve long-term sustainable growth. The world must choose: cooperation or collapse.