China’s Factory Contraction Deepens In December, More Stimulus Expected

China's manufacturing activity shrank for a third straight month in December and weakened more than expected, clouding the outlook for the country's economic recovery and raising the case for fresh stimulus measures in the new year.

The government has in recent months introduced a series of policies to shore up a feeble post-pandemic recovery, which is being held back by a severe property slump, local government debt risks and soft global demand. But the world's second-largest economy is still struggling to gain traction.

The official purchasing managers' index (PMI) fell to 49.0 in December from 49.4 the previous month, an official factory survey showed on Sunday, below the 50-mark separating growth from contraction and weaker than a median forecast of 49.5 in a Reuters poll.

"We must step up policy support, otherwise the trend of slowing growth will continue," said Nie Wen, an economist at Hwabao Trust. Nie expects the central bank to cut interest rates and banks' reserve requirement ratios (RRR) in the coming weeks.

"Falling prices have greatly affected companies' profits and further affected people's employment and incomes. We may see a vicious cycle," he said.

China's central bank said on Thursday it would step up policy adjustments to support the economy and promote a rebound in prices, amid signs of rising deflationary pressures.

Earlier this month, top Chinese leaders at a key meeting to chart the economic course for 2024 pledged to take more steps to support the recovery next year.

Five of China's largest state banks lowered interest rates on some deposits on 22 December, the third round of such cuts this year, which could help the central bank move toward easing monetary policy.

The government, which in October unveiled plans to issue 1 trillion yuan (USD140.89 billion) in sovereign bonds to fund investment projects, is likely to focus on more fiscal steps to support growth next year, analysts said.