Chinese economic data ameliorates post Covid-19 shock, Will the recovery continue?

• Manufacturing and Services PMI rise to multi-month high
• Stimulus package by government likely to aid economic output
• China seems better placed than other major economies

As major developed and developing economies in the world continue to reel under the economic and health crisis emerging due to the Coronavirus pandemic, recent Chinese economic cues depict moderate optimism about the overall health of the economy. As per the latest report from the National Bureau of Statistics, China; manufacturing as well as non-manufacturing PMI (Purchasing Managers Index) numbers showed amelioration in the month of June while the figures from the private agency Caixin/Markit also improved to multi-month highs.

The official manufacturing gauge for the month of June showed, factory activity expanded to 50.9, higher than 50.6 figure, reported in the previous month and stood better than market and analysts’ expectations. The index stood above the critical 50 level mark, for the last 4 months, after recording the steep drop towards 35.7 level in the month of February, an outcome of the lockdown and restrictions imposed by the Chinese government (Index data above 50 signals expansion, while a reading below 50 indicates contraction). The non-manufacturing data (services sector) from the government also displayed improvement with the index standing at 54.4 in June, better than 53.6 in May month, also rising for the last 4 months in a row. Amongst the 21 sectors surveyed for studying and understanding the breadth of the services sector in the country, 15 showed expansion.

Separately, the private sector gauge which focuses on smaller and mid-sized companies and takes cues from updates and survey from purchasing executives of over 400 private manufacturing companies also improved in the month of June. The data released by Caixin and IHS Markit show manufacturing PMI jumped to 51.2 from 50.7 in May registering its best levels since January this year while also recording its fastest increase in month on month rise in PMI index since December last year. If we look at the internals of the governments manufacturing gauge, the sub-indexes which define production expectations, new orders, and supplier’s distribution, all enhanced in the month of June. However, raw materials inventory index as well as employment index continue to tread in the contraction zone, (below the 50 level) alongside the highly important data over New-export orders which also remained deeply into the negative zone. The index value on new-export orders improved to 42.6 as compared to 35.3 in the May month, however, it remains way below the expansion territory and indirectly reflects the problems faced by Chinese companies in getting external orders.

Notwithstanding the weakness due to external issues, domestic growth is recuperating wherein positivity in the broader economy can also be seen through related data points on industrial production, retail sales and overall bank credit growth (though new bank loans fell in May) during last couple of months. Industrial production in China increased by 4.4% in the month of May on a YoY comparison, modestly lower than economists’ expectations though stronger than the 3.9% figure in April and as compared to the negative readings in the first 3 months of 2020. Industrial production plunged by 13.5% in the first 2 months of 2020 and fell by 1.1% (YoY) in March. Though rate of growth is not as strong as expected, modest but consistent increase alongside healthy PMI numbers (leading indicator) is likely to extend the production growth in the coming months.

Further anticipated improvement is backed by the stimulus provided by the government and Chinese Central bank recently. This was after the country recorded 6.8% decline in its GDP in the first quarter of 2020. Lockdown within China and other parts of the world pushed the second largest economy in the world into contraction, its first drop since at least 1992, when the government started recording the quarterly GDP data. The Chinese government came out with a 3.6 Trln Yuan (USD ~$500 Bln) fiscal stimulus in the month of May as the country works to reduce the aftershocks of the coronavirus pandemic. The total package, is moderately lower than the markets expectations and even less than what the government had proposed after the 2008 financial crisis. However, we may see a likely increase  in case the economy once again trips down into extended slowdown due to unexpected issues over Coronavirus, which has been fairly under control in China at least till now (in comparison to other major economies).

The economic package is targeted towards infrastructure investment to drive actual economic output as well as issue of special Treasury bonds for pandemic relief. The government is also said to accept an increased planned fiscal deficit up to 3.6% of GDP, up from 2.8% during the previous year. This is a record, as Chinese government has traditionally followed a 3% border for fiscal deficit, wherein the government is ready to bear the brunt of higher expenditure to counter the pandemic. Within the guidelines of the package, the government would also issue 1 Trln Yuan worth of treasury bonds, for the first time since 2007. Central bank is also doing its bit by providing continued liquidity into the system while has also reduced reserve requirement ratio alongside reduction in relending and rediscounting rates. The government hasn’t even set an official target for the economy for the year 2020, its first such case which indirectly reflects the scenario that it is ready to take a hit on the growth number, but safeguarding businesses, health of the people and employment is the primary focus.

While China also suffered a major blow due to Covid-19, still, things look much better in the country as compared to other major economies in the world. Whether we look at the US, other countries in the Americas, European region or other parts of Asia, all major economies outside China are either under lockdown or are trying to recover from the Coronavirus shock. This has internally (within the country) and externally (from one country to other country) restricted the movement of man and material while many are witnessing severe deterioration in economic activity. Since China managed to control and restrict the Coronavirus cases majorly in and within Wuhan, it has seen its manufacturing and service facilities come back to life relatively sooner wherein they stand in much better shape than other economies at this stage. Though external demand would continue to be a bigger issue in the next few quarters too, China, if it is able to manage and maintain control over the Covid-19 cases, as it did till now, will continue to recover and is likely to see better growth than most major economies in the world by the end of 2020. Already, recent forecasts from IMF project a modest 1% GDP growth in China for full year 2020, as compared to all other major developing and developed economies expected to continue see contraction during the same period.