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Data miss reveals fragility of China's recovery
Summary: China's weaker-than-expected April PMI prints show why we were right to treat with caution the green shoots of economic recovery evident in March. Bottom line – China isn't out of the woods yet.
Both the Caixin and official PMI readings fell in April, underscoring that last month’s recovery in China’s manufacturing activity and the green shoots seen to date in the country's economy remain fragile. China’s April PMI was weaker than expected but remains in expansionary territory (above 50) for the for the second consecutive month signalling that stabilisation continues but activity levels remain precarious and the economy is not out the woods yet.
As we highlighted last month, before reading too much into the strong data set in March it would be preferable to see more data that suggest a bottoming out with this weak patch, as the strength could have been boosted by seasonal effects assigned to the carry over effects from Chinese New Year. The strong rebound in the output components in March likely reflected factory activity picking up after the holiday season, and in reality, a sustained recovery of that pace will be difficult to achieve.
Today’s data confirms the theme being seen in Japan, South Korea and Singapore where exports to China are still collapsing and at odds with the picture painted by the Q1 GDP beat which showed that China’s economy expanded 6.4%.
As we highlighted last month, before reading too much into the strong data set in March it would be preferable to see more data that suggest a bottoming out with this weak patch, as the strength could have been boosted by seasonal effects assigned to the carry over effects from Chinese New Year. The strong rebound in the output components in March likely reflected factory activity picking up after the holiday season, and in reality, a sustained recovery of that pace will be difficult to achieve.
Today’s data confirms the theme being seen in Japan, South Korea and Singapore where exports to China are still collapsing and at odds with the picture painted by the Q1 GDP beat which showed that China’s economy expanded 6.4%.
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.
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.
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