MNI INTERVIEW: Weak China PMI Demand Needs Fiscal Support

Chinese manufacturing risks further declines in the second half without continued fiscal and monetary support, after worse-than-expected PMI data revealed the highest proportion of companies expressing concerns over demand in the survey’s history, Chen Zhongtao, vice director at China Logistics Information Center (CLIC), told MNI.

China’s economic recovery will face strong headwinds in the second half should demand contract further, said Chen, adding that the state of the world economy means exports cannot be relied upon to fill the gap. While some in policy circles are calling for the People’s Bank of China and fiscal authorities to be cautious in continuing expansionary policy, given that the year’s 5% growth target is within reach and the dangers of stoking financial imbalances, Chen said fiscal policy settings in particular should remain supportive.

“We should be cautiously optimistic about the recovery considering the serious hit from Covid in the past three years,” Chen said, but he noted that the abrupt slowdown in Q2 following the rapid recovery of the previous quarter had been surprising. “Therefore, comparative expansionary fiscal policy and accommodative monetary policy should be continued.” (See MNI: China Faces H2 Headwinds As Consumption Weakens).

May’s Manufacturing Purchasing Managers’ Index missed expectations, registering 48.8% for its second consecutive monthly contraction, according to data jointly released by CLIC and the National Bureau of Statistics on Monday. Non-manufacturing PMI also slowed, to 54.5% from the prior month’s 56.4%, and new-order sub-indices declined for both PMIs. (See MNI BRIEF: China's May Manufacturing 48.8, Services PMI 54.5)

Chen said weak fresh demand was the most important issue facing the economy. The production sub-index sunk into contraction territory at 49.6 in May, slower than April's 50.2, while the new-order sub-index printed at 48.3, from last month's 48.8.

“58.8% of surveyed manufacturers reflected weak demand in May, the highest level since the survey started,” Chen said, noting sluggish new orders had pressured both traditional industries and smaller companies.

Small enterprise PMI dropped to 47.9%, while medium-sized companies recorded 47.6%, falling over 1pp compared to April. The basic raw material sector PMI, which slid 2.1pp in May to 45.8%, was the biggest contributor to the decline in the overall index, while the weakness in traditional basic material industries, like steel and cement, highlighted the frailty of recovery in investment in infrastructure and property.

GOVERNMENT SUPPORT

Fiscal policy should remain positive, said Chen, adding that authorities should if necessary consider increasing the CNY3.8 trillion quota for local government special bonds, which are paid off using revenue from projects they fund. The People’s Bank of China should also remain flexible, he said, though it had to be cautious given that history shows excessive loosening boosts speculation rather than supporting the real economy when growth slows and investment demand weakens.

Low inflation provides additional space for policy support, though it heightens competition between companies still struggling from the impact of Covid, Chen noted. Purchase price and factory-gate price sub-indexes printed at 40.8% and 41.6% in May, falling 5.6pp and 3.3pp from April.

Imbalances in regional growth also offer opportunities for fresh spending in infrastructure, education and medical services, he said, calling for more coordination between local governments and pointing to projects such as the creation of city circles like that in the Beijing-Tianjing-Hebei region, unification of domestic markets and rural regeneration.

Meanwhile, new growth engines are gaining momentum, Chen noted. Equipment and hi-tech manufacturing PMI recorded 50.4% and 50.5% in May, up 0.3pp and 1.2pp from April.