(Nov 30): Activity in China’s manufacturing and services sectors shrank in November, adding to expectations for additional government support for the economic recovery, as it struggled to regain steam.

The official manufacturing purchasing managers index (PMI) fell to 49.4, the second straight month of contraction, according to a Thursday statement from the National Bureau of Statistics (NBS). While economists expected a decline in the index, the number was lower than estimates.

A gauge of non-manufacturing activity — which measures the construction and services sectors — unexpectedly eased to 50.2, barely clearing the 50 mark above which indicates expansion. An underlying measure of services activity fell to 49.3, the first contraction for that gauge this year.

“Today’s PMI reading will further raise the expectations towards policy support,” said Zhou Hao, the chief economist of Guotai Junan International in Hong Kong. “Fiscal policy will be under the spotlight, and takes the centre stage over the coming year.”

China’s CSI 300 Index edged up slightly in the morning session on Thursday, as some traders bet on further government support for the economy after the disappointing data. Still, the gauge was close to hitting a fresh 2023 low, and on track to become the world’s worst-performing major equity benchmark this month.

The world’s second-largest economy is still on track to reach an official growth goal of around 5% for 2023, but questions remain about its ability to sustain momentum headed into next year.

The property sector remains a key threat to growth. Falling home sales have curbed demand for everything from furniture to decorations and home appliances. The nation’s rebound in services — a key recovery driver earlier this year — has been tapering off. A gloomy job market has also kept consumers cautious about spending more.

A sub-measure of new orders placed with Chinese factories dipped to a five-month low of 49.4 in November, with a shrinkage in new export orders even worse, according to the NBS. The sub-gauge of employees was entrenched in a contraction at 48.1.

The government has in recent months worked to support activity by ramping up bond sales for infrastructure investment. A gauge of construction activity rose in November to 55, from 53.5 the prior month, NBS data showed.

“China’s economic activity continued to stabilise, but the pace slowed,” senior NBS analyst Zhao Qinghe said in a statement accompanying the data. “The recovery foundation still needs to be consolidated.”

The weakening in services activity was partly because it compared to October, when travel and tourism boomed during the Golden Week holiday, Zhao added.

While many economists expected factory activity to shrink in November, the decline was still “particularly disappointing”, according to Michelle Lam, a Greater China economist at Societe Generale SA in Hong Kong.

“That shows that the recovery in private demand remains very fragile, while the government’s stimulus has yet to show up on data,” she said.

Policy support should remain a “tailwind” over the coming months, according to economists at Capital Economics Ltd.

“Property easing measures continue to be refined, with policymakers now refocusing on shoring up developer financing,” they wrote in a research note.

China is weighing a plan for lenders to offer developers unsecured loans for the first time, and also working on a draft list of firms eligible for bank support, Bloomberg News has reported. Both are part of a package of new measures to back-stop the real estate industry.

Economists at Nomura Holdings Inc said they expect “another economic dip” towards year end and into spring 2024, citing a tapering of pent-up services consumption, and the deteriorating property sector, among other factors.

“The pain of another dip may finally convince Beijing to play the role of a lender of last resort to rescue some major troubled developers, and fill the vast funding gap for building and delivering those pre-sold homes,” they wrote in a note after the PMI data.

“Policies are likely to continue focusing on fostering and spurring demand, and the dependence on fiscal policy will rise,” said Bruce Pang, the chief economist for greater China of Jones Lang Lasalle Inc. He expects the fiscal deficit ratio to reach 4.3% next year, adding to the voices who see that figure staying above the 3% level the government has typically adhered to.

The Capital Economics analysts also suggested that policymakers may resume cutting rates, given easing pressure on the yuan.

China will likely wait until early next year to trim policy rates to support the economy, according to the latest Bloomberg survey of economists.