Data miss reveals fragility of China's recovery

The official Purchasing Managers’ Index, which primarily tracks large companies and state-owned enterprises, slowed to 50.1 in April, down from the sharp rebound to 50.5 in March, according to data released by the National Bureau of Statistics. Output, new orders, inventories and employment sub-indices all fell. 

There was a bright spot in the official PMI: new export orders component continued to pick up from last month, tentatively signalling that the sub-index has bottomed in February. But new export orders are still in contractionary territory, indicating external pressures on China’s economy remain, pertaining to weak global demand impacted by both the trade war and the slowdown evident in the global economy.

Small businesses continue to be hit harder than larger firms, remaining in contraction, but there was improvement as this sub-index rose to 49.8 from 49.3 last month. 

The Caixin Manufacturing Purchasing Managers’ Index, which primarily tracks small companies, slowed more sharply to 50.2, down from the March reading of 50.8. Because the Caixin PMI tracks smaller firms, it is much more volatile and more prone to seasonal effects. The Caixin PMI also signalled a more worrying trend in new export orders, the sub-index not only remained in contraction but has slid further into contraction since last month. The Caixin PMI tends to be more skewed towards export orientated firms, so maybe providing the clearer picture of persistent external pressures as global demand is still suffering.

China has recently signalled a shift in the broad-based supportive policy stance towards a more targeted and less aggressive stimulus mix in favour of pursuing structural reforms due to debt concerns. See Caixin Global, Bloomberg and The South China Morning Post for more background. Whilst the April PMIs remain in expansionary territory, lingering pressures remain, and the slide from last months bounce back likely means the pursuit of structural reforms will be less avid until a sustained stabilisation in the data is visible. Stimulus measures are likely to remain supportive in order to bolster economic growth and are unlikely to be wound back until later this year when the recovery is less fragile. But by the same token, unless we see the economic slowdown deepen again, a large scale stimulus is not on the cards for the remainder of 2019.