China’s economy continued strong recovery from coronavirus shock in July, but challenges remain
- The official manufacturing purchasing managers’ index (PMI) was 51.1 for July, with a reading above 50.0 signifying growth in factory output
- Non-manufacturing PMI was 54.2, with both surveys now reporting positive outlooks for five consecutive months
Buoyed by a construction boom, China’s economic recovery continued apace in July, new sentiment data suggested.
The official manufacturing purchasing managers’ index (PMI) for July stood at 51.1, with a reading above 50.0 suggesting expansion in factory output.
The PMI is a sentiment gauge, conducted through a survey of factory owners and purchasing managers. It offers an early snapshot of the state of China’s economy during the month ahead, quizzing operators on issues like hiring, export orders and inventory.
The official non-manufacturing PMI, also released by the National Bureau of Statistics (NBS) on Friday, was 54.2 for July, down from 54.4 in June but slightly below analysts’ expectations of 54.5. This survey takes the mood among the services and construction sectors. In the construction sector, sparked by a building boom, sentiment rose to 60.5 from 59.8 in June, while in services it edged down slightly to 53.1 from 53.4.
Combined, the surveys are a leading indicator used as a barometer for the economic health of the economy for the month ahead. The composite PMI, which combines both verticals, came in at 54.1 in July from 53.4 in June, signalling a broad if gradual steadying across the Chinese economy.
This stands in stark contrast to economic data in other leading economies around the world. The US economy – the world’s largest – shrank by a record 32.9 per cent in the second quarter of 2020. This is among the biggest markets for Chinese goods – despite billions of dollars of trade war tariffs, and a dent to demand emanating from this near-collapse would likely hit China’s producers.
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What is the purchasing managers' index (PMI)?
The pace of this growth has surprised many, given that parts of the economy have yet to return to full capacity, but the general trend across multiple data sets has been upwards.
Factory owners still do not expect to be hiring significantly more staff over the coming month, with the employment metric coming in at 49.3 for July, slightly higher than June’s 49.1. For non-manufacturing firms this was 48.1, from 48.7 in June.
With President Xi Jinping attempting to steer the economy towards domestic consumption and self-reliance, policymakers may be pleased to see domestic orders improving. New orders rose to 51.5 for manufacturing firms in July, while it ticked up to 51.7 for non-manufacturers, both slight increases on June.
“Through planning for combining pandemic control and development policies, China's economic climate has continued to recover, and business operations have continued to improve,” said Zhao Qinghe, a senior statistician at the National Bureau of Statistics.
China has seen a few pockets of coronavirus outbreaks in recent weeks, suggesting that the recovery might still be fragile.
Furthermore, China has been besieged by near nationwide flooding – the worst in decades – since early-June. Heavy rainfall has hit regions across the country, spanning 27 provinces, with at least 21 declaring critical levels of flooding.
The government this week estimated a direct economic hit of US$16.6 billion, with more than 2 million people displaced along the Yangtze River. Analysts have pointed to the potential of this disaster to hijack China’s recovery.
Additional reporting by Orange Wang