China's Factory Activity Shrinks Again in November, Services Cool

01/12/2025 06:05 AST

China's factory activity shrank for an eighth month in November while services cooled, highlighting the dilemma facing policymakers over whether to press ahead with tough structural reforms or roll out more stimulus to lift domestic demand.

The manufacturing purchasing managers' index rose to 49.2 in November from 49.0 in October, the National Bureau of Statistics' survey showed on Sunday, remaining below the 50-point mark separating growth from contraction. It was in line with analysts' forecast of 49.2 in a Reuters poll.

The data reflects manufacturers' difficulty in sustaining a recovery after COVID-19, compounded by a trade war with the US that has ramped up pressure on businesses.

Output stalled, with the sub-index coming at 50.0. Sub-indexes of new orders and new export orders both improved from October but remained below 50.

Although manufacturing continued to slow in November, "We maintain our view that government may hold off on major policy support until the first quarter next year, since this year's growth target appears broadly achievable," Goldman Sachs economist Yuting Yang said in a research note.

The government's 2025 growth target is around 5%.

For decades, China's policymakers have had two reliable levers to juice growth: revving up the nation's huge industrial machine to boost exports when household spending softened, or unleashing state-funded infrastructure projects to drive momentum.

But with a global slowdown, a protracted property crisis and local governments straining under debt, officials are finding it hard to jump-start activity, putting renewed focus on the need for economic reforms.

Despite the overall November decline, the PMI for small manufacturing firms rose by two percentage points to a six-month high of 49.1, NBS data showed.

That improvement may have been driven by export resilience and by President Donald Trump reducing the high US tariffs he had placed on Chinese goods, said Tianchen Xu, senior economist at the Economist Intelligence Unit.

The non-manufacturing PMI, which includes services and construction, fell to 49.5 from 50.1 in October, shrinking for the first time since December 2022.

Services fell below 50 for the first time since September 2024 to the lowest since December 2023, as a boost from an October holiday waned, according to the NBS.

"The business activity index for real estate and household services sectors both fell below 50, indicating subdued market activity," said Huo Lihui, an NBS statistician.

But the services business outlook sub-index came in at 55.9, indicating service enterprises maintain an optimistic outlook on future market development, Huo said.

Policymakers acknowledge the need for reforms to correct long-standing supply-demand imbalances, lift household spending and address the heavy local government debt that prevents many provinces - some with economies the size of countries - from standing on their own.

Even so, they recognize that such structural changes will be painful and carry political risks at a time when Trump's trade war is piling additional pressure on the economy.

China unveiled a plan to boost consumption on Wednesday, homing in on upgrades of consumer goods in rural areas and sectors such as "pet, anime and trendy toys."

"If the government can earmark a third round of its consumption subsidies to the services sector in 2026, that would provide a great lift to the industry and its employment," the EIU's Xu said.