MNI: Official China PMI In Expansion, But More Stimulus Needed

The Chinese economy is accelerating from months of strict pandemic restrictions, with the latest view on manufacturing and services now well into expansion territory, but further pro-growth policies are required to keep the momentum, according to analysts.

The official manufacturing purchasing managers index rose to 50.2 in June from May’s 49.6, the first time since February for the index to rise back above the breakeven 50, data by the National Bureau of Statistics showed on Thursday.

WEAK DEMAND

The economy is in a period of fast repair after Covid-19 lockdowns, as supply improved amid smoother logistics and pent-up demand got released. But such momentum may not be sustainable given the overall weak demand, wrote analysts from China Minsheng Bank Research Institute in a WeChat blog post.

Though manufacturing activities continued to recover, 49.3% of enterprises still reported insufficient orders, NBS analyst Zhao Qinghe said in a separate statement. Meanwhile, the ex-factory prices sub-index fell to 46.3 from May’s 49.5, indicating squeezed profit margins and operating pressures for manufacturers, Zhao added.

Notably, the deceleration in recovery first appeared in large-scale enterprises, with their PMI slowing to 50.2 from May’s 51. This is because large manufacturers took the lead in the resumption of work and production and encountered the real problem of sluggish demand ahead of the curve, the Minsheng analysts said.

The PMI of medium- and small-size enterprises both rose by 1.9 percentage points to 51.3 and 48.6, respectively.

REBOUNDING SERVICES

One brighter spot is the non-manufacturing PMI, which measures business sentiment in the services and construction sectors, climbed to over one-year high of 54.7 from the contracting readings over the past three months, according to the NBS.

Businesses in rail and air transportation were higher than 65, while accommodation, catering and cultural, sports and entertainment rose above 50 with the business volume turning from a decline to an increase, said Zhao.

The recovery of the flow of people has led to a rapid rebound in services, and this is expected to be further supported by recent relaxations on quarantine requirements and travel restrictions, including the removal of the asterisk mark in travel code which was used to flag people who have been, or even just passed by cities with mid- or high-risk areas in the past 14 days, wrote analysts from Zheshang Securities in a research note.

The financial hub Shanghai emerged from two-month lockdowns has allowed restaurants in some areas of the city with lower Covid-19 risks to resume dine-in services this week, followed by the reopening of museums, cinemas and tourist attractions starting early July.

Minsheng analysts believe only after the consumer and the real estate markets stabilise, the endogenous vitality of the economy can be further exerted. The proportion of potential home buyers in the next three months fell by 1 pps to 16.9% in Q2 from Q1, the lowest level since Q4 2016, according to a quarterly survey by the central bank released this week. SEE: MNI: Consumer Spending A Concern For China's Economic Rebound

Some policy advisors called for the issuance of over CNY1 trillion Special Treasury Bonds in Q3, to fill a fiscal gap and help boost consumption, SEE: MNI: China Mulls Massive Special Treasury Issuance To Perk GDP

While unemployment is reshaping people’s purchasing power, savings propensity rose by 3.6 pps to 58.3% in Q2 from Q1, hitting a record high, the central bank survey showed.