China’s economy continued strong recovery from coronavirus shock in July
Buoyed by a construction boom, China’s economic recovery continued apace in July, new sentiment data suggested.
The official manufacturing purchasing managers’ index (PMI) for July stood at 51.1, with a reading above 50.0 suggesting expansion in factory output.
This was slightly better than June’s reading of 50.9 and was better than analysts’ expectations, with the median result of a Bloomberg survey standing at 50.8.
The PMI is a sentiment gauge, conducted through a survey of factory owners and purchasing managers. It offers an early snapshot of the state of China’s economy during the month ahead, quizzing operators on issues like hiring, export orders and inventory.
The official non-manufacturing PMI, also released by the National Bureau of Statistics (NBS) on Friday, was 54.2 for July, down from 54.4 in June but slightly below analysts’ expectations of 54.5. This survey takes the mood among the services and construction sectors. In the construction sector, sparked by a building boom, sentiment rose to 60.5 from 59.8 in June, while in services it edged down slightly to 53.1 from 53.4.
Combined, the surveys are a leading indicator used as a barometer for the economic health of the economy for the month ahead. The composite PMI, which combines both verticals, came in at 54.1 in July from 53.4 in June, signalling a broad if gradual steadying across the Chinese economy.
This stands in stark contrast to economic data in other leading economies around the world. The US economy – the world’s largest – shrank by a record 32.9 per cent in the second quarter of 2020. This is among the biggest markets for Chinese goods – despite billions of dollars of trade war tariffs, and a dent to demand emanating from this near-collapse would likely hit China’s producers.
Both the manufacturing and non-manufacturing PMIs have now been in positive territory for five successive months, following the historic collapse in January and February that saw the manufacturing survey come in at 35.7 and non-manufacturing at 29.6.
China’s economy has recovered from the 6.8 per cent contraction in the first quarter contraction, with official growth of 3.2 per cent in the second quarter.
South China Morning Post
China’s Economy Sped Up in July as Factory Output Recovered
The first official gauge of China’s economy in the second half of the year showed continued upward momentum in the recovery.
The official manufacturing purchasing managers’ index in July rose to 51.1 from 50.9 a month earlier, according to data released by the National Bureau of Statistics Friday.
The non-manufacturing gauge dropped slightly to 54.2, while the construction indicator rose back above 60. Readings above 50 indicate improving conditions from the previous month.
Exports improve, although services slow slightly
The rebound in economic growth is continuing into the second half of the year as government-led investment gains traction and global demand recovers. Economists have revised up their forecasts for full-year growth, and now see China’s economy expanding 2% this year.
Construction activities continued to improve due to the speeding up of infrastructure projects, according to the NBS, with the construction employment indicator rising to 56.2.
However, job and income losses will weigh on the recovery by limiting people’s ability to spend. Further smaller virus outbreaks will also damage confidence and spending, especially on catering, accommodation and tourism.
“The supply side is still on track towards further improvement, but the employment index remains weak in both manufacturing and services PMIs — so demand will still take some time to recover, said Zhou Hao, senior emerging markets economist at Commerzbank AG in Singapore. “The virus resurgence will certainly cloud the recovery process in the household demand.”
Heavy flooding in central and southern China and viral outbreaks have caused some disruptions but are not expected to derail the economic recovery, according to a report from Bloomberg Economics before the data was released.
A sub-index of new export orders for factories climbed to 48.4, while new orders was also higher at 51.7.
A sub-index of manufacturing employment rose to 49.3, while non-manufacturing employment slowed to 48.1.
Separate PMI data on China’s high-tech sector and small businesses showed the economy has improved in the month, while a Bloomberg Economics gauge of early indicators suggested a slight deceleration.
China’s Top Leaders Lay Out Economic Agenda as Focus Shifts From Pandemic Support
China’s top leaders laid out their economic strategy for the second half of the year at a meeting on Thursday, calling for measures to boost domestic demand and ensure the country achieves “high-quality” development amid a complicated and challenging environment.
Although the recovery from the coronavirus pandemic has been better than expected, the economy faces medium- and long-term problems and resolving them will be like “fighting a protected war,” the official Xinhua News Agency said in a report on the meeting of the Politburo, which comprises the 25 most-senior officials of the Communist Party and is headed by Xi Jinping. The meeting reiterated a strategy laid out in May that the country should focus more on stimulating domestic demand to fuel economic growth, what has been officially termed as a “dual circulation” or “dual loop” growth model.
“The current economic situation is still complex and grim with instabilities and uncertainties,” according to a read-out of the meeting issued by Xinhua. “Many problems we encounter are medium and long term, and must be approached from the mindset of fighting a protracted war. We should accelerate the formation of a new development pattern with domestic circulation as the main body, with the dual circulation of domestic and international markets supporting each other,” according to a readout (link in Chinese) of the meeting.
The comments reaffirm policymakers intention to make the domestic market the focus of support in the post-coronavirus era as overseas demand is expected to remain subdued due to the global coronavirus pandemic and geopolitical and trade tensions.
“We believe the core of the new thinking in Beijing is ‘turning inward’,” economists at Nomura International (Hong Kong) Ltd. wrote in a note. “In the past couple of months Beijing has increasingly highlighted a new phrase called the ‘Inner Loop’ which is essentially a combination of import substitution (or self-sufficiency) and domestic demand expansion.”
The absence of reference to the Belt and Road Initiative (BRI) in the official read-out of the meeting, and the highlighting of the “inner loop” indicates a shift in the national strategy, which is driven not only by the pandemic, but also the U.S.-China trade war, geopolitical tensions, the growing list of countries banning Huawei and issues with the BRI, they said. “A retreat might make sense for China, as it needs to adjust its role in the global arena.”
Domestic circulation “is the new strategy from Beijing in coping with the new world,” Hong Kong-based economists at Macquarie Group Ltd. wrote in a note. “In plain English, it means domestic market first. “[T]he idea is to tighten China’s grip on supply chains and reduce the reliance on foreign suppliers.”
In terms of short-term monetary policy, Thursday’s meeting appeared to tone down the previous loose-policy stance, a recognition of the need to avoid the negative side effects of excessive stimulus seen after the global financial crisis, and to focus on tackling long-term problems, analysts said.
According to the readout, the Politburo called for a long-term balance between stabilizing growth and preventing risks, and “pursuing a more proactive and effective fiscal policy that delivers solid outcomes, and a more flexible and appropriate monetary policy that targets sound results.” Compared with the agenda set at April’s Politburo meeting (link in Chinese), there was no mention of cutting interest rates and banks’ reserve requirement ratio.
The agenda implies that the central government is already considering and designing an exit from its stimulus policies, Zhu Baoliang, chief economist of the State Information Center, a think tank linked to China’s top economic planning body, told Caixin.
China’s economy posted a better-than-expected performance in the second quarter, with GDP growing 3.2% year-on-year, a return to growth after a record 6.8% contraction in the first quarter. Investment, consumption and industrial output all showed an improvement compared with the first three months of the year.
“At this moment, strong data in Q2 convinced Beijing that now is the window to normalize policy and contain risks,” Macquarie economists Larry Hu and Ji Xinyu wrote. “Beijing knows well that ultra-loose policies could cause asset bubbles, so it has to walk the tight rope between current growth and future risks.”
The Politburo also indicated that even as it seeks to support the economy through the coronavirus-induced slowdown, derisking is still high on the agenda. Xinhua’s report of the meeting specifically mentioned the need to crack down on illegal activity in the stock market and to curb real estate speculation.