China’s V-shaped recovery from the pandemic hit a soft patch in May. Increases in exports, industrial production, fixed asset investment and retail sales were robust compared to a year ago at 27.9%, 8.8%, 15.4% and 12.4% respectively. But each data release rose less than expected.
Similarly, June’s purchasing manager indices signal China’s soft patch continued last month.
The official PMI survey showed sentiment in China’s manufacturing sector dipped from 51.0 in May to 50.9 in June (a reading above 50.0 indicates firms see activity expanding while a print below 50.0 implies orders are contracting). The Caixin PMI survey - including more private sector firms and smaller businesses - also showed manufacturing sentiment declined from 52.0 in May to 51.3 in June.
For services, the slowdown was sharper. June’s official non-manufacturing PMI eased from 55.2 to 53.5 - though it remains in clear expansionary territory - but Caixin services PMI was much weaker, sliding from 55.1 in May to 50.3 in June.
Thus, June’s official composite PMI - combining manufacturing and services - fell from a healthy 54.2 to a still solid 52.9 but June’s composite Caixin PMI declined noticeably from 53.8 to 50.6.
The slowdown in the Caixin data is shown in the chart above. Both PMI surveys are important for China’s near-term outlook.
Source: Bank of Singapore, Bloomberg
First, manufacturing is likely to remain resilient as strong external demand from the global economy’s reopening will keep supporting China’s exports. Though the official and Caixin surveys showed declines in production due to semiconductor shortages, power cuts and an outbreak of the virus in the major hub of Guangdong, new manufacturing orders remained in expansionary territory above 50.0.
Second, the setbacks for services PMIs in the official and Caixin surveys show consumption is vulnerable to China’s small local virus outbreaks.
Thus, China’s soft patch may extend further into the summer, challenging the near-term outlook for risk assets. The weakness in services PMI signals consumption may take longer to return to pre-pandemic levels. At the same time, infrastructure investment has moderated as local governments see less need to borrow and spend on new projects with the pandemic receding after last year’s shock. This in turn has caused a broader slowdown in China’s credit growth this year.
But China’s soft patch is still likely to be temporary only. In the second half of the year activity is set to rebound with exports buoyant as foreign economies reopen, consumption firmer as China’s vaccinations accelerate, tame inflation allowing the People’s Bank of China to refrain from lifting interest rates and local governments increasing spending if activity remains soft. Thus, we forecast 2021 GDP will still rise sharply by 8.7%.
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