Recent economic data releases paint a picture of overall weakness, with consumer spending growth particularly sluggish and the PMI remaining below the 50% threshold. Although the August manufacturing PMI ticked upward, it still sits under 50%, indicating the sector remains in contraction territory rather than expansion. This aligns with the widely felt reality that the economic fundamentals are not robust, underscoring the need for counter-cyclical adjustments through both fiscal and monetary policies to spur a recovery. Consequently, market expectations are building for continued policy support ahead.
Delving into the official PMI data for August, the manufacturing PMI came in at 49.8%, up 0.6 percentage points from the previous reading of 49.2%. While still in contraction, there is marginal improvement. Breaking this down, the production index rose to 50.4%, up 0.5 percentage points month-on-month, and the new orders index climbed 2.1 percentage points to 50.6%, signaling a notable rebound in demand. However, divergence persists across enterprise sizes: large enterprises recorded a PMI of 50.6%, while medium and small enterprises logged 41.4% and 47.9%, respectively. Large firms clearly outperform their smaller counterparts, with small enterprises faring the worst, a trend that matches on-the-ground observations. On a positive note, the high-tech manufacturing PMI hit 52.9% and equipment manufacturing reached 51.4%, both remaining in expansion territory.
Turning to non-manufacturing, the business activity index held steady at 49.0%, unchanged from the prior month, while the composite PMI output index inched up 0.2 percentage points to 49.5% from 49.3%. For August, both manufacturing and non-manufacturing PMIs stayed below 50%, confirming contraction across the board. In summary, supply and demand showed some recovery in August, with new orders posting the strongest rebound, domestic demand seeing marginal improvement, and high-end manufacturing sustaining its momentum. Yet, difficulties persist for small and medium enterprises, and consumption remains weak, reinforcing the urgency for counter-cyclical policy measures.
What exactly does counter-cyclical adjustment entail? When economic demand is weak, enterprises hesitate to expand, and households are reluctant to spend, the government steps in with measures to counteract the downturn and prevent a sharp decline. This is counter-cyclical adjustment, which is reversed when the economy overheats. Currently, as economic data retreats and consumption and investment growth lag, exports continue to grow at double-digit rates, showcasing the strong international competitiveness of our enterprises. Many companies, unable to find opportunities domestically, are venturing overseas, shifting competition abroad. However, this also leads to some products facing resistance in foreign markets, a challenge we must address.
For the second half of the year, counter-cyclical measures will not involve indiscriminate stimulus but will focus on two core priorities. First, fiscal spending must be accelerated. Special bonds and ultra-long-term special treasury bonds should be deployed swiftly, ensuring projects break ground quickly, converting funds into construction sites, equipment, and orders to generate real demand. For instance, the state plans to invest six to seven trillion yuan this year to build the "six networks"—water networks, new power grids, computing power networks, communication networks, urban underground pipeline networks, and the Internet of Things. I previously discussed this on a CCTV financial program in the first half of the year, and now the focus is on rapid implementation in the latter half.
Second, monetary policy must push down the cost of capital. Ensuring ample market liquidity and lowering interest rates will make it easier for enterprises and local governments to secure loans, complementing fiscal efforts. This is not about simply flooding the market to stimulate real estate, as in the past, but about fostering an environment of low interest rates and ample liquidity to support a recovery. Given that fiscal spending progressed slowly in the first half, the second half will see a push to accelerate spending and roll out more projects. Fiscal policy is now shifting away from traditional real estate toward industrial upgrading, with local government funds serving as a catalyst to attract private capital into joint investments. Key central projects, enterprise equipment upgrades, technological renovations, urban renewal, and the new infrastructure "six networks" will all see substantial investment to stabilize the economic growth foundation, while consumption is gently supported through expanded trade-in programs and local government debt risks are managed to free up resources for consumer spending.
On the monetary front, rate cuts and reserve requirement ratio reductions remain on the table, but with policy rates already relatively low, the likelihood of significant cuts is limited. Credit growth has slowed, though structurally, the traditional real estate chain is contracting while lending to new industries is comparatively healthier. Turning to aggregate social financing, growth remains subdued, reflecting weak corporate loan demand, which requires effective measures to boost confidence. A rising social financing scale signals a greater willingness among enterprises to expand production, making it a key indicator to watch. In simple terms, social financing represents all new funds that the real economy obtains from the financial system, serving as the "master score" for domestic credit. It is typically analyzed alongside PMI and CPI—PMI gauges production and demand, while social financing reflects capital supply and borrowing appetite.
Social financing comprises several components: RMB loans, the largest segment covering corporate loans, residential mortgages, and consumer loans; government bonds, including treasury and local special bonds, which have been the primary driver of social financing growth in recent years; direct enterprise financing, such as corporate bonds and IPOs; and non-standard financing, including trust loans, entrusted loans, and undiscounted bank acceptances. For August, central bank data showed new social financing at 3.12 trillion yuan, well above the 2.69 trillion yuan expected, while new RMB loans reached 1.36 trillion yuan, also exceeding forecasts of 1.25 trillion yuan. M2 money supply growth was 10.6%, slightly down from 10.7% previously, with M1 growth at 2.2% year-on-year.
Interpreting this, the financial data exceeded expectations overall, driven by heightened government bond issuance and a pickup in corporate credit—positive news. However, M1 saw a slight decline, with corporate demand deposits showing weaker activation, indicating that enterprises remain cautious about expanding production even after securing funds. Residential mortgages remain soft, with no clear recovery in real estate chain financing demand. Cross-referencing the August PMI of 49.8%, it is evident that capital deployment is already ramping up, but real sector demand is recovering more slowly—essentially a case of "capital leading, demand lagging."
For domestic equities, the low M1 growth rate is a key concern. M1 is often dubbed the "all-purpose indicator," with higher growth typically signaling a strengthening stock market. Currently, M1 growth is only 2.2%, down from 2.3% in July, suggesting the market lacks conditions for a significant rally and is likely to experience a repair-type rebound instead. When M1 growth begins to trend upward, the stock market often performs well. Regarding the RMB exchange rate, the marginal improvement in domestic credit has alleviated depreciation pressure. For commodities, this is favorable for industrial metals, though weak real estate demand means any price increases are more sentiment-driven than fundamentals-backed. In the bond market, improving credit conditions have reduced expectations for aggressive rate cuts, making long-term yields more likely to rise than fall, which pressures bonds.
Looking ahead, investors should keep an eye on capital flows. One focus is the "six networks," a key national priority this year, which presents opportunities. Another is new quality productive forces, encompassing AI and high-end manufacturing, including artificial intelligence, humanoid robots, semiconductors, industrial mother machines, aerospace, and biomedicine—all offering medium-to-long-term prospects. For now, it is prudent to watch and act sparingly, maintaining a reasonable position. Once this adjustment phase concludes, the AI and manufacturing direction will remain a core focus. Additionally, equipment upgrades, manufacturing technological renovations, green and low-carbon industrial chains, and consumption are areas likely to see policy stimuli. This could sustain sector rotation driven by policy, paving the way for a rebound. Maintaining confidence and patience in the market outlook is essential.
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