China factory activity suffers record drop due to holiday stockpiling

By Joe Cash and Xiuhao Chen

BEIJING, Dec 31 (Reuters) – China’s factory activity unexpectedly grew in December, breaking a record of eight straight months of decline, boosted by a surge in pre-holiday orders, as officials seek to stimulate the manufacturing sector of the $19 trillion economy without worsening deflation.

The official Purchasing Managers’ Index (PMI) rose to 50.1 in December from 49.2 in November, the National Bureau of Statistics survey showed on Wednesday, surpassing the 50-point mark separating growth from contraction and beating a forecast of 49.2 in a Reuters poll.

“Assuming the improvement in PMIs is confirmed in hard data, we think it will likely be ‌a short-lived rebound in activity supported by monthly swings in fiscal spending rather than the start of a more sustained recovery,” said Julian Evans-Pritchard, head of China economics at Capital Economics.

“The overall picture is that structural headwinds from the real estate crisis and industrial overcapacity will persist into 2026,” he added.

Still, the data should give policymakers cause for optimism after opting to end 2025 without significant additional stimulus to meet the full-year growth target of around 5%.

The production subindex jumped to 51.7 from 50.0 in November, while new orders rose to 50.8 from 49.2, marking its strongest performance since March. Supplier delivery times also improved, bringing the production and activity expectations component to 55.5, its highest reading since March 2024.

However, new export orders remained sluggish, rising to 49.0 from 47.6 in November, underscoring the need for officials to boost domestic demand and rely less on demand from the United States, the world’s top consumer market, in the face of President Donald Trump’s tariffs.

NBS statistician Huo Lihui said sentiment appeared to be improving due to pre-holiday stockpiling, as the world’s second-largest economy prepares to celebrate the Lunar New Year in February, pointing to a rebound in the agricultural, food processing and food and beverage sectors.

A separate private sector PMI released on Wednesday also showed a marginal expansion in activity in December, driven ‌by stronger production and domestic demand in the absence of more external orders.

DEPRESSION OF DOMESTIC DEMAND

However, boosting domestic manufacturing without taking additional steps to boost consumer demand risks worsening deflationary pressures.

In separate data released last week, Chinese industrial firms saw profits fall 13.1% year-on-year in November, the sharpest drop in more than a year, suggesting households are not stepping in to make up the shortfall as a slowing global economy weighs on exports.

At an agenda-setting meeting in early December, leaders of the ruling Communist Party promised to raise incomes and stimulate consumption, although similar promises in the past have struggled to deliver results.

Chinese consumers have so far been reluctant to spend, held back by uncertain job prospects and as a prolonged housing crisis drains household wealth.

The official non-manufacturing PMI, which includes services and construction, stood at 50.2, after contracting in November for the first time in almost three years.

Authorities in Beijing have come to recognize the need to rebalance the economy and transform its production-driven model as tensions with key export markets rise.

“The country’s economic development still faces many old problems and new challenges; the impact of changes in the external environment is deepening and the contradiction between strong supply and weak demand is prominent domestically,” the report of the Central Economic Work Conference said.

In an article published by the party’s flagship magazine, Qiushi Journal, in mid-December, President Xi Jinping said there was “general overcapacity” and that “ultimately, consumption is the sustainable driver of economic growth.”

Beijing had previously rejected “overcapacity” as unfair criticism by Western governments of China’s industrial policies.

In a nod to those concerns, authorities have vowed this year to crack down on price wars, cut production in some sectors and step up so-called “anti-devolution” efforts.

The NBS composite manufacturing and non-manufacturing PMI was 50.7 in December, compared to 49.7 in November.

(Reporting by Joe Cash and Xiuhao Chen; Editing by Sam Holmes)