China Two-Speed Economic Recovery Fuels Concerns on Outlook
(Bloomberg) -- China’s economic recovery showed further signs of imbalance, with manufacturing activity contracting for the first time in months while a surge in holiday travel fueled consumer spending.
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The China Caixin manufacturing purchasing managers index dropped to 49.5 last month from 50 in March, pointing to a contraction in factory output for the first time since January, Caixin and S&P Global said in a statement Thursday.
That contrasts with strong tourism figures over the five-day Labor Day holiday, with domestic trips surging 19% above 2019 levels, before the coronavirus pandemic struck. Tourism spending wasn’t as strong, reaching about the same level as pre-Covid times, indicating consumers may be more frugal.
The latest data suggest the economy’s recovery is increasingly patchy, clouding the outlook for growth after a better-than-expected expansion in the first quarter.
China’s rebound is following a similar pattern to other countries after reopening, with demand for goods slowing as consumers increase spending on services, like travel and restaurants. There are a number of other risks as well: the rebound in the property market has only just started, with investment continuing to fall, unemployment, especially among young people, remains high while households are still boosting savings.
“The easy part of China’s post-reopening recovery — which includes the full recovery of mobility and the release of pent-up demand in select sectors — is done,” Goldman Sachs Group Inc. economists, including Wang Lisheng, wrote in a report Thursday. “The next leg of the consumption recovery will rely on higher income growth and improved consumer confidence, which will make the recovery model more sustainable.”
Chinese stocks trimmed earlier losses Thursday as traders weighed the contrasting data. The CSI 300 Index was little changed at its close after dropping as much as 0.7% earlier in the day.
The surge in travel may have crowded out other types of spending, like cinema sales. National box office revenue stood at 1.52 billion yuan ($220 million) over the holiday, 9% below the level in 2021 and almost reaching the amount in 2019, according to data from online ticketing platform Maoyan Entertainment. The figures were below some analysts’ expectations, prompting movie stocks to drop on Thursday.
The lopsided recovery underscores Chinese leaders’ cautious outlook on the recovery and their pledge last week to keep monetary and fiscal policy supportive amid insufficient demand in the economy. A top International Monetary Fund official said this week that China “has the policy space to keep monetary policy accommodative because inflation is very much muted.”
The Caixin survey — which covers smaller, export-oriented businesses compared with the official PMI — showed domestic demand was the “main drag” on manufacturing in April. A subindex for total new orders fell back into contraction last month.
“This suggests that China’s economic recovery significantly slowed after Covid-19 infections peaked at the start of this year,” Wang Zhe, senior economist at Caixin Insight Group, said in a statement accompanying the data. “It remains to be seen if the rebound is sustainable after a short-term release of pent-up demand.”
The job market also deteriorated, Wang said, adding that “as market demand remained subdued, businesses trying to slash costs were reluctant to hire more workers, with some even announcing layoffs.”
What Bloomberg Economics Says ...
The Caixin PMI report “did contain one small positive — new export orders held mostly stable – but we see this as unsustainable. Weakening overseas demand and stress in the global system make it hard to be optimistic about China’s export outlook.”
— Chang Shu and David Qu
Click here to read the full report.
Economists expect the pickup in consumption to drive the economy’s recovery this year, with growth likely to reach 5.6% in 2023, according to the latest Bloomberg News survey. That’s above Beijing’s official target of about 5%.
Growth in in-person services will likely slow down in the coming months as pent-up demand wanes, Nomura Holdings Inc. economists including Lu Ting said in a report Wednesday. “The lackluster property recovery, a global slowdown and rising geopolitical conflict remain major challenges for China’s recovery to be sustained.”
--With assistance from Tom Hancock and Fran Wang.
(Updates with additional details on cinema sales.)
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