China's Manufacturing Expansion: A Sign of Economic Resilience

China's manufacturing sector has shown remarkable resilience, with the Caixin China General Manufacturing PMI indicating an expansion for the third consecutive month in December 2024. The PMI rose to 49.0, signaling a contraction in manufacturing activity, but this was an improvement from the previous month's reading of 49.5. Although the PMI fell short of market expectations, which had forecasted a reading of 49.7, the overall trend suggests a recovery in the manufacturing sector.

The recent policy stimulus measures, such as infrastructure investment and tax cuts, have contributed to the manufacturing expansion. According to the Caixin China General Manufacturing PMI, output growth accelerated to its highest level in five months in November 2024, driven by the strongest growth in foreign orders since February 2023 and a renewed rise in exports. The PMI rose to 51.5 in November 2024 from 50.3 in October 2024, marking the second straight month of increase and the fastest expansion in factory activity since June. The renewed expansion in factory activity was supported by increased buying levels and stocks of purchases, as firms built safety stock. Additionally, employment shrank for the third month though the rate of fall was modest, and backlogs of work accumulated for the second month. Delivery time stabilized after lengthening for the past five months. On the price front, input prices rose the most in five months, due to rising raw material costs. Meanwhile, selling prices saw their steepest gain since October 2023. Finally, confidence notched an 8-month peak on hopes of better economic conditions and supportive government policies.

The recovery in domestic demand, particularly in the consumer and services sectors, has also driven manufacturing growth. The Caixin China General Manufacturing PMI for November 2024 showed that output growth accelerated to its highest level in five months, driven by a renewed rise in new orders and increased buying levels. This indicates that consumer demand was robust, leading to increased production in the manufacturing sector. The non-manufacturing PMI for June 2024 was 50.5 percent, higher than the threshold, indicating a continued expansion in the non-manufacturing industry. This suggests that the services sector was also recovering, which would have contributed to the growth in manufacturing. The employment index in the manufacturing PMI for June 2024 was 48.1 percent, unchanged from the previous month, indicating the stable status in the employment climate of manufacturing enterprises. This suggests that the recovery in domestic demand was also creating jobs in the manufacturing sector. The purchasing levels index in the manufacturing PMI for June 2024 was 49.5 percent, a decrease of 0.1 percentage point from the previous month, indicating a decline in the climate level of manufacturing market demand. However, this decline was likely due to the increased production and output growth, as firms were building safety stock.

The improvement in export orders, driven by global demand and the recovery in major economies, has also had a significant positive impact on the manufacturing sector. The Caixin China General Manufacturing PMI data for November 2024 showed that export orders increased at the fastest pace since February 2023. This growth in export orders was the highest in five months, indicating a strong rebound in global demand for Chinese goods. The increase in export orders led to a renewed rise in new orders, which grew at the fastest pace in four months. This growth was driven by both domestic and foreign demand, with output growth accelerating to its highest level in five months. The increase in new orders and output growth resulted in a significant expansion in factory activity, as indicated by the PMI rising to 51.5 in November 2024, the highest level since June 2023.

The specific sectors within manufacturing that contributed most to the expansion in December include equipment manufacturing, high-tech manufacturing, automatic data processing machines and components, clothes and clothing accessories, and mobile and car telephones. These sectors contributed significantly to the overall expansion in manufacturing output.

The PMI data for December 2024 was 49.0, which was a decrease from the previous month's reading of 49.5. This was also lower than market expectations, which had forecasted a reading of 49.7. The decline in the PMI indicates a contraction in manufacturing activity, as a reading below 50 indicates a decrease in activity. This was the first time since April 2023 that the PMI had fallen below 50, signaling a slowdown in the manufacturing sector.

The implications of the PMI data for China's economic growth and policy decisions in the coming months are significant. The Caixin China General Manufacturing PMI has been showing signs of improvement, with November 2024's reading of 51.5 indicating an expansion in factory activity. This is the highest level since June 2023 and the second consecutive month of growth. This suggests that China's manufacturing sector is recovering, which bodes well for overall economic growth. However, it's important to note that the PMI is still below the 54.90 point peak reached in November 2020, indicating that there is still room for improvement.

The PMI data suggests that the recent policy stimulus measures have been effective in supporting growth. However, the World Bank's China Economic Update warns that subdued household and business confidence, along with headwinds in the property sector, will continue to weigh on growth in 2025. Therefore, policymakers should consider the following:

* Balancing Short-term Support with Long-term Structural Reforms: The World Bank emphasizes the importance of balancing short-term support to growth with long-term structural reforms. This could involve addressing challenges in the property sector, strengthening social safety nets, and improving local government finances.
* Targeted Stimulus: Given the varying performance of different sectors, policymakers may want to consider targeted stimulus measures to support sectors that are lagging behind, such as the property sector.
* Fiscal and Monetary Policy: The PMI data suggests that there is still some slack in the economy, which could justify continued fiscal and monetary policy support. However, policymakers should also be mindful of the risks of excessive debt accumulation and inflation.
* External Demand: The PMI data shows that export orders have been improving, with the new export order index reaching 48.3 in June 2024. This suggests that external demand is recovering, which is positive for China's economic growth. However, policymakers should also be mindful of the risks associated with relying too heavily on external demand, such as the impact of global economic slowdowns and trade tensions.
* Inflation: The PMI data shows that input prices have been rising, with the main raw material purchase price index reaching 48.2 in June 2024. This suggests that there is some inflationary pressure in the economy. Policymakers should monitor inflation closely and adjust policies as needed to maintain price stability.

In conclusion, the PMI data suggests that China's manufacturing sector is recovering, which is positive for overall economic growth. However, policymakers should consider targeted stimulus measures, balance short-term support with long-term structural reforms, and monitor inflation closely to ensure sustainable economic growth.