China Growth Pullback – What’s Next?

Overview

China’s latest activity surveys looked weak – in part due to weaker global demand - but surging construction/infrastructure can improve the growth outlook in H2.

China Slowdown

China’s first activity survey for Q3 was disappointing. The official manufacturing PMI¹(Purchasing Managers Index) dropped back into contraction zone (49.0) after spending just 1 month above 50.0, and the services PMI moderated more than expected (53.8). Details show that the deterioration was wide-spread – all manufacturing PMIsub-indices except two were in contraction territory, including large companies, employment, imports, and new orders. An uptick in the number of COVID cases is one plausible explanation, especially as regards services. The weaker consumer sentiment due to the on-going uncertainty in the housing market is another likely reason.

Global Growth Headwinds

Many commentators also drew attention to growth headwinds created by weaker global demand. This narrative was corroborated by the fact that China’s new export orders PMI moved deeper into contraction zone (47.4). South Korea’s daily export growth – an often-used global activity gauge – also showed virtually no signs of a sequential rebound after a very weak print in June. Further, the latest batch of activity surveys in DM (developed markets) was generally weaker than expected. And, finally, there are signs of an H2 growth “cliff” in parts of EM (emerging markets), with a sharp deterioration in July PMIs in Poland, the Czech Republic, Mexico, and Turkey.  

China Policy Stimulus

One – by now traditional - question to ask when China’s activity surprises to the downside is whether we are going to see additional policy stimulus. The latest signal from the Politburo is “not necessarily”. The numerical growth target (of around 5.5%) is being replaced by “a reasonable” growth range, with a seemingly different set of priorities (the zero-COVID policy topping the list). Another consideration here is that the infrastructure package might be bringing results – the construction PMI surged from 52.2 in May to 56.6 in June and further to 59.2 in July (see chart below). This might not generate a stratospheric rebound in H2, but we can easily see stronger growth that will be less balanced (i.e. driven by investments/infrastructure rather than consumption), but nevertheless no longer heading south. Stay tuned!

Chart at a Glance: China Growth – Construction to the Rescue?

Source: Bloomberg LP