China's Economy Faces Further Setbacks Amid Manufacturing Declines

Recent surveys indicate China's economy continues to weaken, with manufacturing orders falling at their fastest pace in two years. Despite government stimulus measures, including reduced interest rates and mortgage down payments, and soaring stock markets, significant fiscal support remains crucial for a cyclical recovery.

China's economy has displayed further signs of weakening in recent weeks, according to surveys released on Monday, underscoring the urgent need for government support as stimulus efforts intensify.

The Caixin purchasing managers survey reported a significant drop in new manufacturing orders, falling at their fastest rate in two years during September.

The National Bureau of Statistics also released data showing a fifth consecutive month of contraction, although to a lesser extent, with the purchasing managers index rising slightly to 49.8 in September from a six-month low of 49.1 in August, on a scale where figures above 50 denote expansion.

While factory output saw an increase, new orders declined. In response, Chinese stock markets surged on Monday, reflecting optimism amid a series of policy measures unveiled last week that included lower interest rates, reduced mortgage down payments, and a cut in required bank reserves.

The Shenzhen smaller market index soared by 8.2%, while the Shanghai Composite index gained 5.7%.

"The stimulus package announced last week should help bolster activity in the forthcoming months," noted Gabriel Ng of Capital Economics. However, Ng also cautioned that the imbalances between excess supply and weak demand persist, with trade measures like increased tariffs on Chinese goods posing additional challenges.

According to Ng, a substantial fiscal stimulus is essential for a meaningful cyclical recovery. Although an official announcement on fiscal support is yet to come, some media reports indicate one might be imminent.

Over the past weekend, Beijing implemented measures to support the property sector and revitalize flagging financial markets, including a directive from the central bank for banks to reduce mortgage rates for existing home loans by October 31.

In addition, Guangzhou lifted all home purchase restrictions, while both Shanghai and Shenzhen disclosed plans to ease key buying curbs. The property sector downturn has had widespread effects on China's economy, impacting industries reliant on housing construction like appliance manufacturing and building materials production.

As a result, China's economy grew at a 4.7% rate in the last quarter, slightly below the government's 5% target.

(With inputs from agencies.)