China to boost fiscal spending in 2023, manufacturing contracts

China said it will boost fiscal spending “appropriately” in 2023 to support the slowing economy, focusing on tech innovation and key strategic sectors, the finance ministry said.

“Pro-active fiscal policies will be more effective, precise and more sustainable,” the ministry said in a statement, without elaborating.

“We will maintain the necessary expenditure intensity and will vigorously optimise the structure of spending and step up support for major national strategic tasks.”

The government will actively support key areas including science and technology and rural and green development, the ministry said.

China’s factory activity shrank at the sharpest pace since the pandemic first emerged nearly three years ago, after Beijing’s abrupt reversal of counter-epidemic measures this month set off a wave of COVID infections across the country.

The official purchasing managers’ index (PMI) fell to 47.0 in December from 48.0 in November, the National Bureau of Statistics (NBS) said on Saturday. Economists in a Reuters poll had expected the PMI to come in at 48.0. The 50-point mark separates contraction from growth on a monthly basis.

The drop was the biggest since the early days of the pandemic in February 2020.

The data offered the first official snapshot of the manufacturing sector after China removed the world’s strictest COVID restrictions in early December. Cumulative infections likely reached 18.6 million in December, UK-based health data firm Airfinity estimated.

Analysts said surging infections could cause temporary labour shortages and increased supply chain disruptions.

Reuters reported on Wednesday that Tesla planned to run a reduced production schedule at its Shanghai plant in January, extending the reduced output it began this month into next year.

Weakening external demand on the back of growing global recession fears amid rising interest rates, inflation and the war in Ukraine may further slow China’s exports, hurting its massive manufacturing sector and hampering an economic recovery.

“Most factories I know are way below where they could be this time of year for orders next year.

A lot of factories I’ve talked to are at 50 per cent, some are below 20 per cent,” said Cameron Johnson, a partner at Tidalwave Solutions, a supply chain consulting firm.

“So even though China is opening up, manufacturing is still going to slow down because the rest of the world’s economy is slowing down. Factories will have workers, but they will have no orders.”

NBS said 56.3% of surveyed manufacturers reported that they were greatly affected by the epidemic in December, up 15.5 percentage points from the previous month, although most also said they expected the situation would gradually improve.

Chinese President Xi Jinping, in his New Year’s Eve speech on state television, said China’s 2022 economic output was expected to exceed 120 trillion yuan ($17.4 trillion).

In 2021, inflation-adjusted gross domestic product reached 114.92 trillion yuan, up 8.4 per cent from 2020.

GDP expanded 3 per cent in the first nine months of 2022, versus China’s official full-year goal of around 5.5 per cent. The World Bank expects 2022 growth of 2.7 per cent.

China’s banking and insurance regulator pledged this week to step up financial support to small and private businesses in the catering and tourism sectors that were hit hard by the COVID-19 epidemic, stressing a consumption recovery will be a priority.

The non-manufacturing PMI, which looks at services sector activity, fell to 41.6 from 46.7 in November, the NBS data showed, also marking the lowest reading since February 2020.

The official composite PMI, which combines manufacturing and services, declined to 42.6 from 47.1. “The weeks before Chinese New Year are going to remain challenging for the service sector as people won’t want to go out and spend more than necessary for fear of catching an infection,” said Mark Williams, chief Asia economist at Capital Economics.

“But the outlook should brighten around the time that people return from the Chinese New Year holiday - infections will have dropped back and a large share of people will have recently had COVID and feel they have a degree of immunity.”

Meanwhile China will improve its policy on cutting taxes and fees next year and will optimise its policy tools such as fiscal deficit, special bonds and interest subsidies, the ministry said, without giving any details.

Government advisers have urged policymakers to allow the budget deficit in 2023 to increase in order to better support the COVID-ravaged economy.

China has set an annual budget deficit target at around 2.8 per cent of GDP for 2022, along with an annual quota of 3.65 trillion yuan for local special bonds to fund infrastructure investment.

China’s tax and fee cuts in recent years have lowered the ratio between tax revenues and GDP to 15 per cent in 2021 from 17 per cent in 2018, the ministry added.