China update - Economic recovery picks up steam

The surge in China’s PMI surveys signals economic recovery picking up momentum

The headline official National Bureau of Statistics Manufacturing Purchasing Managers Index (NBS Manufacturing PMI) surged to 52.6 in February, the highest level since 2012, from 50.1 in January. The strength was across the board with the Production sub-index and New Orders sub-index improving markedly to 56.7 and 54.1 respectively. When a diffusion index goes above 50, it signals expansion.

The export sector, which has until now been sluggish, showed signs of a strong recovery. The New Export Orders sub-index in the NBS survey unexpectedly surged to 52.4 in February from 46.1 in January and was the first time returning to the expansion territory in 23 months. Caixin Manufacturing PMI, which covers smaller and more private enterprises in the export-oriented coastal region relative to those covered in the NBS survey, also recovered strongly to 51.6 in February from 49.2 in January and the new export orders sub-index in the Caixin survey bounced to 52.2 from 48.7.

The NBS non-manufacturing PMI continued to accelerate well into expansion, rising to 56.3 from 54.4. Both major sub-indices rose further, with the Services sub-index advancing to 55.6 and the Construction sub-index soaring to 60.2.

The surge in the PMI data is the latest confirmation of the economic recovery in the making from the confluence of the reopening from Covid-19 containment and upturns in the credit cycle and the regulatory cycle (normalization and stability instead of tightening), and the emergent tendency of a more conciliatory external policy as noted in our Q1 outlook.

China consumer and technology stocks are likely to benefit from the cyclical upturn

As economic activities, household income and people mobility pick up from the pandemic containment, consumption is set to recover in the coming months. The in-person service industries will probably experience the biggest jump in activities. Technology stocks that operate B2C e-Commerce platforms will benefit from the increase in consumption. In addition, the more relaxed and institutionalized approach of regulation over the tech industries will also remove some of the uncertainty overhangs troubling investor sentiment towards mega-cap China internet stocks. Chinese consumer and technology stocks may benefit from the PMIs today and more incoming economic data that confirm a cyclical upturn is in place in the Chinese economy.

Below is Saxo’s China Consumer and Technology equity theme basket for the inspiration of ideas. They are not stock recommendations and readers are encouraged to do further research into companies listed in the theme basket.