China recovery on track but could lose momentum

China's factory PMI came in at 50.9 points for June, better than some forecast and up 0.3 points from May, but analysts say the risk of contraction lingers

China recovery on track but could lose momentum
Factory activity picked up in June 2020, slightly more than some had forecast, but the spread of the coronavirus still hangs heavily over the Chinese economy because of its impact both at home and abroad. File photo by AFP.

(ATF) China's factory activity picked up pace in June suggesting the recovery in the world’s second largest economy is still on track, although some analysts warned that parts of the data release suggested recovery momentum could lose steam in coming months.

China’s official manufacturing PMI rose to 50.9 in June from 50.6 in May, outpacing the consensus estimate of 50.5, while the non-manufacturing PMI also rose to 54.4 in June from 53.6 in May, also ahead of the consensus of 53.6.

“The latest survey data suggest that economic growth accelerated in June thanks to a faster recovery in manufacturing and services, alongside continued strength in construction activity,” Martin Rasmussen, China economist at Capital Economics, said.

The export orders component jumped, pointing to a rebound in foreign demand, though it remains much weaker than overall new orders, while input and output prices rose to their highest level in 2020, another sign that demand is recovering and easing disinflationary pressures, Rasmussen said.

The world's second-largest economy has been whirring back to life after the virus and sweeping lockdowns prompted a near-halt in activity.

But economists caution momentum may weaken in the second half of 2020 on weaker demand and as orders for medical supplies abroad – which have boosted exports – peak and fall. The re-imposition of lockdowns in parts of the economy was also a concern.

“The export orders component jumped, pointing to a rebound in foreign demand, though it remains much weaker than overall new orders … the recovery momentum could lose some steam in coming months,” Ting Lu, Nomura’s chief China economist, said.

“The impact of recently re-imposed lockdown measures in Beijing and its surrounding regions after a cluster of new Covid-19 infections has not been fully reflected in the data, as the existing social distancing requirements may significantly constrain the pace of recovery in the services sector, especially for the catering and accommodation industry.”

Senior statistician Zhao Qinghe noted that the surprise uptick came as "supply and demand continued to pick up" in June, while imports and exports are also looking better as major global markets restart their economies.

'Uncertainties, contraction risk'

But Zhao warned that there were still "uncertainties", with the import and export indexes still below the 50-mark and a larger number of smaller enterprises reporting a lack of orders.

ING's chief economist for Greater China Iris Pang said most of the service industries that showed a positive PMI in June were domestic-related, and new export orders for services continued to be in contraction.

“The divergence of the domestic recovery and foreign orders contraction highlights that the Chinese economy remains affected by the global situation for the Covid-19 pandemic. As new infection cases globally continue to grow, we believe that China will continue to face a contraction in export orders in the coming months.”

Still, some economists say that although exports look ripe for a pullback despite the improvement in export orders last month, the slack could be taken up by infrastructure.

“The continued rapid issuance of government bonds means that infrastructure spending should remain strong and help keep the recovery on track,” said Capital Economics’ Rasmussen.

While there has been a strong recovery between March and mid-June, Nomura economists believe a full economic recovery remains distant.

“In our view, it is too early for Beijing to reverse its easing stance; we maintain our call for 150bp of total RRR cuts over the remainder of this year and believe the next RRR cut could come very soon, at a scale of 50-100bp,” Lu said.

with additional reporting by AFP