China Growth – Taming Headwinds
September 30, 2022
Read Time 2 MIN
China Domcestic Activity
The latest activity gauges confirmed that weak consumption and external demand create major problems for China’s near-term growth outlook. The official services PMI (Purchasing Managers Index)1dropped sharply to 50.6, whereas the new export orders PMI moved deeper into contraction zone (47.0). The Caixin manufacturing PMI – which has a larger share of exporters and small privately-owned companies – deteriorated for the third consecutive month, staying in contraction zone (48.1 – see chart below). China’s reluctance to introduce major changes to the zero-COVID policy, the housing sector disruptions, and a higher risk of global recession (especially in DMs) suggest that these growth headwinds can persist for a while, explaining the ongoing cuts in the consensus forecast for China’s 2022 real GDP growth (now at 3.3%).
China Infrastructure Plan
These are the reasons why the upcoming congress of the communist party will be closely watched for signals about policy priorities. But what we can say for sure is that China’s plan to boost infrastructure investments is working, at least partially offsetting the softening growth momentum. China’s construction PMI accelerated to 60.2 in September (see chart below) - and there’s more in the pipeline, including policy banks’ new infrastructure credit package (CNY300B), additional issuance of local government special bonds (CNY500B), and a “fast-track” approval of new infrastructure project in cities and provinces.
China Housing Support
We also keep an eye on the measures to stabilize the housing sector and boost consumption. China’s demand side stimulus is still an “orphan” (compared to a barrage of supply-side measures), but it is conceivable that the recent small cuts in deposit rates by major banks can help to reduce savings at the margin. We also learned earlier this week that banks will now be allowed to cut mortgage rates for first-time home buyers in cities with declining housing prices. Finally, the central bank’s statement on the Q3 monetary committee meeting mentioned a possibility of boosting special loans to ensure the completion of property projects. Stay tuned!
Chart at a Glance: China Activity Gauges – Ups and Downs
Source: Bloomberg LP
1We believe PMIs are a better indicator of the health of the Chinese economy than the gross domestic product (GDP) number, which is politicized and is a composite in any case. The manufacturing and non-manufacturing, or service, PMIs have been separated in order to understand the different sectors of the economy. These days, we believe the manufacturing PMI is the number to watch for cyclicality.
