China's economic recovery broadens albeit at a slow pace

Lockdown measures imposed around the world to fight the coronavirus has hit foreign markets and dragged down demand for Chinese exports 

China's economic recovery broadens albeit at a slow pace
Demand for Chinese exports has dropped worldwide, but a noodle factory in Wuhan has at least done well from the 'Buy products from Wuhan' campaign in China. Hot dry noodles known as reganmian have become a popular product online. Orders trebled in the six weeks to April 7 and still can't meet demand. Photo: MA Luyao / Imaginechina, AFP

(ATF) Factory activity in China remained in expansionary territory as the world’s second-largest economy extended its recovery, broadening the rebound to other parts of the manufacturing sector although the overall pace of growth remained modest.

Early on Monday, Caixin PMI data, which focuses on smaller export-driven firms, revealed manufacturing output increased by the strongest since January 2011.

The headline seasonally adjusted PMI – a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy – rose from 49.4 in April to 50.7 in May.

“The above 50.0 reading signalled a renewed improvement in overall operating conditions midway through the second quarter, albeit one that was only marginal,” the compilers said in a report.

The Caixin China General Manufacturing PMI™ is compiled by IHS Markit from responses to questionnaires sent to purchasing managers in a panel of around 500 private and state-owned manufacturers.

“Supply was generally stronger than demand in the manufacturing sector, as production continued its expansion amid a broader economic rebound while demand had yet to recover,” Dr Wang Zhe, senior economist at Caixin Insight Group, said.

The Caixin manufacturing PMI rose to a four-month high of 50.7 in May, beating the Bloomberg consensus of 49.6.

“That brings it broadly in line with the official manufacturing PMI, which was initially quicker to recover from the Covid-19 outbreak but has since lost momentum,” Julian Evans-Pritchard and Martin Rasmussen, economists at Capital Economics, said in a note.

“Given the differences in the sample between surveys, this suggests that the recovery in manufacturing has now become more broad-based. New orders inched up across both indices as new export orders increased. And although the output and employment measures weakened a bit on the official measure, they strengthened on the Caixin survey.”

Official PMI

Data published on Sunday, which showed official manufacturing PMI (the Purchasing Managers' Index) eased to 50.6 in May from 50.8 in the previous month, although still in expansionary territory, according to the National Bureau of Statistics (NBS).

NBS senior statistician Zhao Qinghe pointed to weakness in China's imports and exports, saying "the epidemic situation and economic situation globally remain severe and complex, and foreign market demand is still shrinking".

Zhao said indexes on new export orders and imports remained at relatively low levels.

The "momentum of economic recovery is steady and improving", Zhao added, but there was weakness in some industries, such as textiles and apparel.

Non-manufacturing PMI was at 53.6 in May, a slight increase from the month before, with the NBS flagging that the construction and service industries are showing signs of recovery.

Business activity in the cultural, sports and entertainment industry, however, remains low with many entertainment venues still closed amid fears of a second wave of Covid-19 infections.

Nomura analysts said in a report this week that "with economic growth in the major economies of Europe and the Americas set to drop by around 15% year-on-year in the second quarter, China's exports seem poised to fall".

They added that even with exports of coronavirus-related medical supplies providing a boost in recent weeks, this was not likely to offset external challenges.

It was also likely to be "unsustainable" as new cases peak and more countries ramp up their own production of goods, they said.

Employment concerns

Economists flagged concerns around employment, with UOB head of research Suan Teck Kin noting the employment index for both manufacturing and services in the official PMI data were below 50. He said there was a "need to watch on that, especially with China's official job creation number adjusted downward quite significantly this year".

On Monday, Caixin PMI compilers said the employment subindex remained in negative territory although it rebounded from the previous month, while adding that pressure on the job market should not be underestimated.

“Stabilising the job market is a top priority on policymakers’ agenda this year, as shown in last month’s government work report. Boosting employment is not an easy task, as the employment subindex in the Caixin manufacturing PMI survey has remained in contractionary territory for five months in a row,” Caixin’s Wang said.

Premier Li Keqiang's annual work report this year at the National People's Congress made stabilising employment a top priority, targeting new urban employment of over nine million – a drop from 11 million targeted in 2019 – following the pandemic hit, and probably many more migrant workers from rural areas.

with additional reporting by AFP