China’s Economy Picks Up Steam for Holiday

Factories in September reported their first expansion in activity since the spring, while railway and flight bookings point to a bumper week ahead for tourism as China takes a break to celebrate its weeklong National Day holiday.

The economy is far from full health, though, and economists say it is too early to say if a major turnaround is ahead. A big problem is real estate: A drawn-out downturn in the property market shows few signs of abating and troubles at major developers are mushrooming. China Evergrande Group, once the largest developer by sales, said this week that its chairman, Hui Ka Yan, was under investigation by authorities for potential criminal wrongdoing and that it owes tens of billions of dollars in unpaid bills to lenders, contractors and suppliers. Regulators have also blocked parts of the company’s turnaround plan, an ominous signal for other developers flirting with insolvency.

The economy also faces other challenges. Exports are shrinking and tensions with the U.S.-led West are simmering over issues including trade and technology. Local governments are straining under heavy debts.

Many economists say Beijing will need to step up its stimulus efforts to underpin a stronger and more durable recovery.

“I think we’re bottoming out, but the bottom looks pretty long, for now," said Louise Loo, lead economist for China at Oxford Economics in Singapore. “We need more stimulus."

An official gauge of activity in the nation’s manufacturing sector rose to 50.2 in September from 49.7 in August, China’s National Bureau of Statistics said Saturday, the first time since March that its purchasing managers index crept over the 50 mark that separates expansion from contraction.

A similar gauge of activity for nonmanufacturing sectors of the economy rose to 51.7 from 51, spurred by consumer spending on eating out, travel and other services. Construction activity also expanded at a faster clip, aided by a government push on infrastructure.

Separately, early indications suggest the holiday at the beginning of October will be a bumper one for tourism. The Civil Aviation Administration of China said this week that it expects 190 million people to travel by train during the week and 21 million people to take domestic and international flights. The number of international flights operating during the holiday is expected to be 18% higher than the same week in 2019, the administration said.

The number of passengers traveling by train on Friday, the first day of the holiday, topped 20 million for the first time in history, according to Chinese state media.

The data extends a run of better signals on China’s economy after months of weak readings. Data for August showed consumers spent more freely on cars and smartphones and splurged on summer travel, helping to push inflation back above zero after consumer prices posted a year-over-year fall in July. The urban unemployment rate edged down in August for the first time since April, while banks lent more freely.

The incoming data points to a healthier second half of 2023 for the economy after a difficult first six months. After staging a first-quarter rebound following the lifting of Covid-19 restrictions, a consumer-led recovery in China quickly fizzled out and a weakening global economy began to dent exports. Growth in the second quarter came in at just 0.8% when compared with the first three months, one of the weakest such growth rates in years.

The government in Beijing and China’s central bank have announced a variety of smaller-scale stimulus measures to perk up confidence and get growth going. Many are aimed at stabilizing the teetering housing market, with cuts to interest rates and down payment requirements on mortgages designed to spur borrowing and restore faltering consumer confidence.

Economists say more is needed to prevent growth from flickering out again. Many say the government needs to take more direct steps to boost consumption, perhaps by offering households tax breaks or handing out cash or vouchers for consumers to spend.

The economy is heading for a difficult few years, economists say. Beijing appears determined to nudge the economy away from a growth model driven by property-led investment and toward one powered instead by advanced manufacturing and other sources of what officials call high-quality growth. The adjustment could be painful, economists say.

HSBC this month lowered its forecast for economic growth this year to 4.9% from an earlier expectation of 5.3%, and also cut its projection for 2024 to 4.6% from 4.9%.

“The transitional period may be challenging as the economy grows at a slower-than-expected rate," its economists said in a report. Though they added a successful rebalancing of the economy would put the economy on a healthier footing.

“It’s a case of short-term pain, long-term gain," they said.

Grace Zhu in Beijing contributed to this article.

Write to Jason Douglas at jason.douglas@wsj.com