China’s Economic Outlook in Light of Weakening Factory Activity

China’s manufacturing activity showed a contraction in April, which was lower than the expectations of analysts. This was due to a slowdown in global demand for goods, and Communist party leaders expressed concern that the post-Covid recovery of the world’s second-largest economy had yet to gain solid footing. However, the services and construction sectors, as indicated by China’s non-manufacturing purchasing managers’ index, showed expansion despite the decline from the previous month. This suggests an uneven recovery across the post-Covid economy.

While consumer activity is rebounding from a low base, the rest of the economy faces deeper challenges. The property sector is still struggling after a government crackdown, and export markets are fading as advanced economies weaken. This is similar to the picture seen in March, where manufacturing growth dipped despite an export recovery, while other sectors showed a rapid rise in activity.

The Communist party’s politburo stated that “economic growth has exceeded expectations” but that the “endogenous driving force” of the economy was still weak and demand insufficient. Goldman Sachs noted that the performance of the non-manufacturing index was still solid, indicating a continued recovery in the construction and services sectors but at a slower pace than expected.

The politburo signaled more support for economic recovery, calling for targeted “proactive fiscal policy” and “prudent monetary policy.” They also called for increased incomes for urban and rural residents through multiple channels and for the consumption of services in sectors such as culture and tourism to be boosted.

Nomura predicted that China’s export sectors would face continued challenges as a result of the current worldwide technology slump, increased instability in global financial markets, and worsening trade relations between the United States and China. This decline in exports is anticipated to impede the revival of both job opportunities and manufacturing investment.

In conclusion, China’s economy is recovering unevenly, with manufacturing activity showing a contraction while the services and construction sectors continue to expand. The government is implementing policies to support economic recovery, but challenges remain, particularly in the property and export sectors.

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