China PMI/economy

China PMIs remain downbeat

A further slowdown in the service sector recovery coupled with a slight moderation in manufacturing contraction does not amount to any meaningful improvement to the overall economic backdrop

Mixed news – but no real improvement in total

The latest official PMI data were not uniformly bad. The manufacturing index actually rose slightly, to 49.7, and this is the third consecutive increase since the May trough of 48.8. But it remains below the 50-level that is associated with expansion, and so merely represents a moderation in the rate of decline. That may be of some comfort to those of a sunny disposition.

The non-manufacturing series, which had reflected the bulk of the post-re-opening recovery, fell further in August. The index of 51.0 was a little lower than the forecast figures (51.2) but it is at least still slightly above contraction territory.

China official PMIs (50 = threshold for expansion/contraction)

Brighter signs in manufacturing

Looking at the components underlying both series and starting with the manufacturing series: the latest data show an improvement in production to a point which actually points to expansion. That has to be tempered by the forward-looking elements of orders. Here, the data is mixed. Total orders have improved to hit the 50 threshold signalling that contraction has ended. This must be mainly domestic orders, as the export orders series remains bombed out. But that at least provides some encouragement about the near-term outlook.

Manufacturing PMI components

Outlook for service sector remains negative

The forward-looking elements of the service sector PMI index remain in contraction territory, unlike their manufacturing counterparts, and that suggests that the headline index has probably not yet troughed and will fall further. A glimmer of hope may be in the export series, which, while clearly continuing to signal contraction, did fractionally rise this month.

Overall, though, both series seem to be converging on a point close to 50 consistent with an economy that is neither expanding nor contracting. Things could be worse. But markets are not likely to take too much comfort from this set of data.

Non-manufacturing PMI sub-components

source: ING

Leave a Reply

China manufacturing

China’s GDP for 1Q23 is better than expected

1Q23 GDP grew 4.5%YoY, much faster than the 2.9%YoY recorded for 4Q22. This is a better-than-expected data report. We expect that the government will hold back extra stimulus plans and the yuan should strengthen

GDP grew faster than expected in the first quarter of 2023 with consumption the main growth engine

China’s GDP increased 4.5%YoY in 1Q23, which was better than our forecast of 3.8%YoY, and stronger than the previous quarter’s 2.9%YoY.

The main reason for the faster-than-expected growth was much stronger growth in retail sales, which accelerated to 10.6%YoY in March and 5.8%YoY for 1Q23 after 3.5%YoY growth in January to February. Such rapid retail sales growth has not been seen since June 2021, when it grew 12.1%YoY. The growth in retail sales was mainly boosted by catering.

In contrast, we did not expect infrastructure investment growth to slow to 8.8%YoY for 1Q23, compared to 9%YoY growth in the first two months of the year though infrastructure investment still increased at a speed faster than overall fixed asset investment growth of 5.1%YoY in 1Q23 (5.5%YoY YTD in February).

Even with slower growth in March, we still believe infrastructure should grow faster from 2Q23 after the strong loan growth in March, much of which was for infrastructure projects.

Industrial production grew only at 3.9%YoY in March and 3.0%YoY in 1Q23 and was only slightly faster than the 2.4%YoY growth in the previous quarter. We see fairly modest growth in industrial production as a result of the drag imposed by weakening external demand in the US and Europe. By categories, most electronic production recorded contraction in 1Q23. Micro-computers, integrated circuits and smart devices fell 22.5%YoY, 14.8%YoY and 7%YoY in 1Q23, respectively, and reflecting the burden of US export bans.

China’s retail sales jumped, led by catering

China’s investment is led by infrastructure

Property investment is gradually recovering

Investment by the property sector contracted 5.8%YoY in the first quarter which is slightly worse than the 5.7%YoY contraction in the first two months of 2023. This could be due to the large housing inventories in the market even though property developers that have not defaulted on their bonds and loans should be able to get financing to continue their existing construction. 

On the other hand, residential property sales increase 7.1%YoY YTD in 1Q23 compared to 3.5% in 4Q22. This is quite encouraging as it suggests that some home buyers are regaining confidence in property developers. If pre-sold housing is digested by the market, property developers should be able to get fresh cash flow from home sales in 2024.

What is the implication of this GDP report?

With consumption as high as 10%YoY in March, there is no immediate need for fiscal stimulus to support consumers.

But the government will probably keep its plan of infrastructure investment as a supplementary growth engine as we expect the external market to deteriorate further in 2023.

In short, with this GDP report, we believe there is no immediate need for the government to put massive stimulus into the economy.

Yuan should be supported by this GDP report

USDCNY and USDCNH should strengthen on the back of this report. When comparing the fundamentals of the US and China, China’s economy is strengthening and will get stronger over the rest of the year. In contrast, the US economy will likely continue to slow. This should support the yuan against the dollar from the second quarter. Our forecast on USDCNY and USDCNH is 6.5 by the end of 2023.

source: ING

Leave a Reply

China CNY

China’s central bank pumps more liquidity into market

The People’s Bank of China has already cut its Required Reserve Ratio and has continued to pump liquidity into the money market over the past few days. Is this about global market volatility or is it more about the domestic economy?

What’s behind the large liquidity injection by the PBoC?

China’s central bank, the PBoC, has injected significant liquidity into the market since 21 March. From the 21st to the 29th of the month, the central bank injected more than CNY850 billion of net liquidity into the financial system. This includes CNY352bn injected through daily open market operations and CNY500bn by lowering the Required Reserve Ratio (RRR) which took effect on 27 March.

We believe that there are at least two considerations behind these liquidity injections. 

These operations are occurring at the end of the first quarter. In China, loan growth for the year is usually booked in the first three months. This is a seasonal phenomenon and pushes up interbank interest rates at the end of the first quarter. As the chart shows, the overnight SHIBOR touched 2.5% on 20 March. Therefore, we think that loan growth should continue to be very strong in March compared to 2022, even after the rapid growth in the first two months. If this is the main reason for the PBoC’s big liquidity injection, this should be seen as a positive sign for economic growth.

The volatility in global financial markets is not over; there may be some ups and downs ahead. China has a more open capital account than in the past and global events may have some impact on the Chinese market. As such, the PBoC may be cushioning any potential volatility. This is more of a precautionary measure and should not be over-interpreted.

The market is discussing a rate cut, but we don’t agree

The market is actively discussing that the PBoC will cut the 7D policy rate and the medium-term lending facility (MLF) rate, which are currently at 2.0% and 2.75%, respectively. The discussion has intensified, especially after the PBoC announced a cut in the RRR this month.

We do not see the need for China to lower interest rates. The economy is recovering at this time, although not as fast as the market expected though this is due more to the market’s overestimation of the speed of the rebound. External markets are weakening and export activity will be dampened. But China’s interest rate cuts will not help exports. Moreover, an excessively accommodative monetary policy may attract some unnecessary investments. As the economy recovers more quickly in the second half of the year, interest rate cuts could pose a risk of economic overheating.

source: ING

Privacy Settings
We use cookies to enhance your experience while using our website. If you are using our Services via a browser you can restrict, block or remove cookies through your web browser settings. We also use content and scripts from third parties that may use tracking technologies. You can selectively provide your consent below to allow such third-party embeds. For complete information about the cookies we use, data we collect, and how we process them, please check our Privacy Policy
Consent to display content from - Youtube
Consent to display content from - Vimeo
Google Maps
Consent to display content from - Google