China: Patchy Activity Keeps Policy Makers in Easing Mode China: Patchy Activity Keeps Policy Makers in Easing Mode China: Patchy Activity Keeps Policy Makers in Easing Mode

China: Patchy Activity Keeps Policy Makers in Easing Mode

Macro 6 minutes to read

Summary:  The latest read on Chinas manufacturing sector suggests nascent green shoots remain alive and economic activity, although patchy, is continuing to stabilise into the start of 2020. However, despite signs of stabilisation longer term structural pressures remain and activity levels remain precarious as the tariffs and hangover from the deleveraging drive take their toll on economic activity, which keeps policymakers in easing mode.

Both the official PMI and Caixin PMI remained in expansionary territory in December as the trade détente continues to support business sentiment, although the Caixin PMI was slightly less optimistic than the official data.

The Official PMI, which primarily tracks larger companies and state-owned enterprises, held steady at 50.2 according to data released by the National Bureau of Statistics, beating estimates of 50.1. The output, new orders, and new export orders sub-indices all rose, with new export orders rising above 50 for the first time since June 2018, indicating a potential improvement in both global and domestic demand as sentiment is boosted by the phase 1 trade accord and potential stabilisation in global growth as central banks have stepped up monetary easing.

The Caixin Manufacturing Purchasing Managers’ Index, which primarily tracks small companies and is more balanced toward the private sector, slowed marginally to 51.5, down from last month’s 3 year high of 51.8, narrowly missing estimates of 51.6. Because the Caixin PMI tracks smaller firms, it is much more volatile and more prone to seasonal effects. The Caixin PMI new export orders sub-index expanded only slightly, as the Caixin PMI tends to be more skewed towards export oriented firms it may be providing the truer representation of external pressures as global demand continues to suffer despite the acclaimed trade deal.

Of concern, the employment sub-component of the official PMI remains in contractionary territory below 50, as it has been for 33 consecutive months. The employment index within the Caixin PMI (which is more skewed to the private sector) fell from last month and is only just above contractionary territory. Cracks in the labour market concern policy makers in China, for whom it is crucial to maintain social stability and jobs growth likely keeping employment a policy priority throughout 2020. Small businesses also continue to be hit harder than larger firms, with the sub index for small firms remaining deep in contraction for 15 consecutive months now whilst large firms remained in expansion at 50.6. This is of concern because the private sector now contributes more than 80% of China’s employment and accounts for the majority of new jobs created each year. Signalling still that the pockets of the economy that need it, are not yet feeling the effects of stimulus measures. Hence why steps are being taken to reduce borrowing costs for smaller companies who often face higher interest rates than larger state-owned enterprises, a commitment that will be ongoing throughout the year ahead particularly whilst the growth stabilisation remains vulnerable.

On January 1st the PBOC cut the RRR by 50 bps, effective January 6. The move is expected to release RMB 800bn in base money liquidity ahead of Lunar New Year holiday squeeze, as well as reducing banks’ funding costs by RMB 15bn on an annual basis, helping to bring down financing costs for SMEs and private enterprises. Over the weekend the PBOC also announced financial institutions should re-benchmark loan rates to the loan prime rate (LPR), effectively driving lower lending rates across the economy because the LPR is at 4.15% compared to the old benchmark at 4.35%, notwithstanding cuts to the LPR throughout 2020.

Continued policy support, both fiscal and monetary, will be required to maintain stable economic activity and promote a self-sustaining trajectory for growth. On that basis we expect more RRR cuts and continued support for private firms as this sector continues to drive job creation, accounting for 80% of jobs and more than 90% of new jobs, according to the National Development and Reform Commission of the People's Republic of China.

Trade deal, or not, stimulus measures are likely to remain supportive in order to bolster economic growth and are unlikely to be wound back until recovery is more broad based. But by the same token, the degree of stimulus is limited relative to previous rounds due to concerns regarding financial stability. Chinese policymakers are also focusing on quality over quantity in terms of economic growth and grappling with switching from an export-driven economy to a consumption/ domestic demand-led economic growth model. We have confirmation policymakers will aim to do what is necessary to prevent growth collapsing, but slowing trend growth is palatable as China rebalance their domestic economy, whilst avoiding resorting to what officials have dubbed “flood-like” stimulus. Stabilisation is a priority and there is 0 tolerance for a collapse in growth, but targeted stimulus measures and the absence of a huge reflationary package indicate policy makers are tolerant of slower growth rates. There’s a fine line to walk in avoiding accumulating further financial stability risks associated with very high levels of debt and unmanageable credit growth. The problem of clogged credit transmission, however, remains and stimulus measures fall on a weaker economy saturated with debt where the marginal impact of such measures will be less than in previous episodes of stimulus keeping the trend of slower/lower growth in play.


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
United Kingdom

Support Centre
For existing clients, please click here to request support via the Support Centre.

Have a question about our products, platforms or services? Visit the Support Centre to find answers for our most frequently asked questions. If you are still unable to locate an answer to your question, you will also find contact details for your local Saxo office to speak with a representative.

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.