China’s Economy Faces Challenges: PMI Data and Trade Fears Dominate Outlook

China’s Caixin Manufacturing PMI: Can China Achieve 5% Growth Target?

China’s crucial Caixin Manufacturing PMI unexpectedly dropped from 51.5 in November to 50.5 in December, just above the critical neutral 50 level.

Highlights from the December survey included:

• New orders rose for the third month, though slower due to weakening external demand.
• Backlogs rose at a slower pace, aligning with softer new orders.
• Staffing levels declined for the fourth consecutive month, albeit slower.
• Average selling prices fell for the first time since September, underscoring weaker demand.
• In contrast, input prices rose, forcing manufacturers to absorb higher costs.
• Optimism fell to its lowest since Q3 2024. Concerns about the economic outlook and trade, stemming from US tariff threats, weighed on sentiment.

Dr. Wang Zhe, Senior Economist at Caixin Insight Group remarked on the December data, stating,

“Since late September, the synergy of existing policies and additional stimulus measures has continued to act on the market, producing more positive factors. The economy in general remains stable, on the path to achieving the main goals set for this year.”

Regarding the year ahead, Dr Zhe added,

“The external environment is expected to be more complex this year, requiring early policy preparation and instant response. In addition, future policy efforts should focus more on increasing household income and improving people’s livelihoods, with particular attention paid to increasing socially disadvantaged groups’ ability and willingness to spend.”

How Did the Markets React to the PMI Data?

The Hang Seng Index briefly climbed to a high of 19,933 before the PMI data. However, in response to the December survey, the Index tumbled to a low of 19,543 before stabilizing.

On Thursday, January 2, the Hang Seng Index declined by 1.39% to 19,781.

Mainland China’s markets also trended lower, with the CSI 300 and Shanghai Composite down by 1.22% and 0.79%, respectively.

Policy Support and the Five-Year Plan

December’s PMI came as Beijing reiterated its commitment to achieving the 14th Five-Year Plan. China’s President Xi Jinping recently stated,

“We will accomplish the 14th Five-Year Plan and implement more proactive and effective policies. China’s economy face new situations, challenges.”

China announced the 14th Five-Year Plan in October 2020 at the Fifth Plenum of the 19th Central Committee of the Chinese Communist Party and adopted it in March 2021 at the National People’s Congress.

The Plan outlines China’s major economic and social development goals 2021 through 2025, including targets for GDP growth, technological self-sufficiency, environmental protection, and social welfare. Significantly, there was a notable emphasis on dual circulation, focusing on domestic and international trade and technological innovation, particularly in strategic sectors.

Key components of the 14th Five-Year Plan include:

• Keep major economic indicators within an appropriate range.
• Set annual targets for economic growth in light of actual conditions.
• No specific annual GDP growth target, instead emphasizing ‘reasonable range’ growth.
• Keep the urban unemployment rate below 5.5%.
• Increase R&D spending by at least 7% annually.
• Promote the vigorous development of the service sector.
• Raise the urbanization rate to 65%.
• Create 55 million new urban jobs.
• Increase per capita disposable income in line with GDP growth.
• Maintain prices generally stable.
• Implement frameworks to expand domestic demand effectively and boost consumer spending.

How Did China’s Economy Perform in 2024?

China’s GDP grew by 4.6% in Q3 2024, down from 4.7% in Q2 2024. However, Han Wenxiu, Executive Director of the Office of the Central Committee for Financial and Economic Affairs, recently stated that Beijing remains optimistic about hitting its 5% target.

In December, the World Bank revised China’s 2024 growth forecast from 4.8% to 4.9%, citing fiscal policy measures and near-term trade as contributory factors. However, the Bank expects China’s economy to expand by 4.5% in 2025, well below the Chinese government’s 5% target.

December’s PMI numbers underscore the Chinese economy’s challenges as Trump’s inauguration on January 20 nears.

Expert Insights and 2025 Projections

Natixis Asia Pacific Chief Economist Alicia Garcia Herrero gave a gloomy view of China’s growth prospects for 2025, saying,

“Policy stimulus will be critical for economic growth in 2025. For consumption to rebound, a larger and more effective stimulus will be needed, though its implementation remains uncertain. Adding to this challenge is the increasingly uncertain external environment, which is already taking a toll on exports, as reflected in the weak data from November 2024 (and now December 2024).”

Garcia Herrero projected the Chinese economy to grow by 4.5% in 2025. She attributed the growth target to a pickup in domestic demand, countering weaker export trends but caveated,

“It should be noted that our projection of 4.5 percent growth already assumes some additional stimulus. Without such measures, China’s growth could come closer to 4 percent.”

Garcia Herrero’s comments underscore the importance of stimulus measures addressing consumption and broader domestic demand. Consumer confidence fell near historical lows in Q3 2024, affecting consumption and demand. Beijing must boost confidence by bolstering the labor market and introducing policies targeting household income.

Waning consumer confidence amid fears of a US-China trade war would likely limit the effectiveness of Beijing’s stimulus measures. Conversely, improving US-China relations would support confidence, which could potentially refuel consumption and demand. In this scenario, China may achieve its 2025 growth target.

Key market focal points for Q1 2025 include:

• US-China relations.
• Consumer sentiment.
• Economic uncertainties.
• The real estate market.
• Youth unemployment rate. (16.1% in November).

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