China economic recovery to be short-lived despite manufacturing rebound as analysts fail to upgrade forecasts
- The private Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) edged up on Monday following a surprise growth in the official index at the weekend
- Expansion across China’s factories in November has not led to any upgrade in economic growth forecasts for 2020
China’s weakening economy is showing signs of short-term stabilisation, following two batches of positive manufacturing data and the increased likelihood of a pause in the trade war with the United States, analysts said, although they fell short of upgrading their economic growth forecasts for 2020.
But expansion across China’s factories in November has not led to any upgrade in economic growth forecasts for 2020, with many aware that the official manufacturing PMI grew in March and April, only to slip quickly back into contraction.
The private Caixin PMI, and the new order indices [within that] suggest that we are seeing a range of forward looking indicators that confirm some evidence of near term stabilisation
“The private Caixin PMI, and the new order indices [within that] suggest that we are seeing a range of forward looking indicators that confirm some evidence of near term stabilisation,” said John Woods, chief investment officer for Asia-Pacific at Credit Suisse, suggesting the influence of seasonal factors as manufacturing firms restock inventory in preparation for new year production.
According to Woods, China’s weakening economy is also being cushioned by the central bank’s incremental easing measures that are aimed at supporting the property sector, the second largest pillar of the economy and a major growth driver in the past.
The People’s Bank of China last month cut the five-year loan prime rate, which is used to price housing mortgages, and the move could suggest a softening in regulatory stance toward the property market.
Aninda Mitra, senior sovereign analyst for BNY Mellon Investment Management, said an expected pause in the US-China trade war was a reason for greater certainty in a stabilising economy.
A “phase one” trade deal has been mooted for some weeks now, but reports over the weekend indicated that talks had been upset by US President Donald Trump’s signing of the Hong Kong Human Rights and Democracy Act.
Regardless of this, however, it is expected that if the deal is not reached by December 15, US tariffs on Chinese goods scheduled to go into effect on that date will be postponed.
“A phase one related pause which seems to be around the corner, could herald the end of further scheduled tariff hikes and the rollback of a those imposed in September,” Mitra said.
A phase one related pause which seems to be around the corner, could herald the end of further scheduled tariff hikes and the rollback of a those imposed in September
“Despite the improvement in the employment sub-index [of the Caixin PMI], we believe headwinds to employment, especially among [small and medium-sized enterprises] and export-oriented enterprises located in eastern coastal regions, remain quite strong, given weakening domestic demand and still-elevated uncertainty over US-China trade disputes,” he said.
Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, which works with Caixin on the report, warned that business confidence remained subdued, as firms’ concerns about government policies and their willingness to replenish stocks remained limited. He added that manufacturing investment may be close to bottoming out.
“If trade negotiations between China and the US can progress to the next phase and business confidence can be repaired effectively, manufacturing production and investment are likely to see a solid improvement,” Zhong said.
Mitra from BNY Mellon Investment Management added that a minor trade deal may not be sufficient to help a fully-fledged economic recovery in China, given the deflationary pressure that is heavily weighing on manufacturing firms’ profits.
If trade negotiations between China and the US can progress to the next phase and business confidence can be repaired effectively, manufacturing production and investment are likely to see a solid improvement
“With credit growth slowing and property construction still expanding at an unsustainable rate, we doubt this signals the bottom of the current economic cycle,” added Julian Evans-Pritchard, senior China economist at Capital Economics.
Woods at Credit Suisse forecasts China’s economic growth to slow to 5.9 per cent in 2020, from Beijing’s target of between 6 per cent to 6.5 per cent for this year, amid ongoing trade volatility.
“The [China]-US relationship is unlikely to run in an entirely smooth line. It’s hard to believe that we are going to see continued and consistent improvement in their relations,” Woods said.
