China economic activity stabilised in May, but ‘rosy picture’ faces multiple challenges ahead
- Official manufacturing purchasing managers’ index (PMI) fell slightly to 51.0 in May from 51.1 in April
- Non-manufacturing PMI – which gauges activity in the services and construction sectors – rose slightly to 55.2 from 54.9 the month before
The “rosy picture” of China’s economic activity as it stabilised in May faces multiple challenges ahead as high commodity prices, chip shortages, the uncertainty of the yuan’s direction and a resurgence of coronavirus cases in the key factory province of Guangdong present an elevated level of risk, analysts said.
A slight drop in manufacturing sector activity in May, attributed partly to factory closures for the seven day “golden week” holiday at the start of the month, was offset by a slight rise in non-manufacturing sectors that were boosted by consumer activity during the break, according to the latest official purchasing managers’ indices (PMI) released on Monday.
A reading above 50 indicating growth in sector activity, while a reading below the mark represents contraction. The higher the reading above 50, the faster the pace of expansion.
After the spending spree in May, we think that consumers will start saving for the long October holidays for their next spending spree
The official non-manufacturing PMI – which measures morale in the services and construction sectors – rose to 55.2 in May from 54.9 in April. The reading was slightly above expected.
“After the spending spree in May, we think that consumers will start saving for the long October holidays for their next spending spree. There may still not be a revival of international travel by then, but Chinese consumers can still spend in duty-free shops within China,” said Iris Pang, chief economist for Greater China at ING bank.
“External demand will likely remain flat since even with economic recovery in the US and parts of Europe as vaccine roll-outs suppress the Covid pandemic, this is likely to be offset by increasing Covid cases in [the Association of Southeast Asian Nations], which is the biggest trade partner of China.”
The stabilisation in May came after a decline in activity in April, reinforcing expectations by analysts that Chinese economic activity may be peaking in the second quarter of the year.
“We expect increasing downward pressure on growth in the second half of the year, especially in the fourth quarter, as pent-up demand subsides, exports weaken as reopening developed markets shift back to services consumption, property tightening measures finally bite, and surging raw material prices suppress real demand,” said Nomura economists led by chief China economist Lu Ting.
“On the recent surge of raw material prices, the markets have been increasingly debated on whether it’s imported or domestic, whether it’s due to too much demand or limited supply. But no matter what the driver is, the rapid rise in raw material prices is set to dent demand soon for two major reasons: firstly, with the same amount of money (assuming a fixed credit growth target this year), higher prices mean less real demand; and secondly, surging raw material prices mean higher costs and squeezed margins for firms in downstream sectors, constraining their production and causing some supply chain disruptions.
The recovery momentum of the service industry continues to consolidate. From the perspective of the sector, driven by the Labour Day holiday, the consumer market continues to heat up
The official composite PMI – a combination of the manufacturing and non-manufacturing indices – rose to 54.2 in April from 53.8 in May.
Within non-manufacturing PMI, the service sector index fell slightly to 54.3 in May from 54.4 in April, while the construction index rose to 60.1 from 57.4.
“The recovery momentum of the service industry continues to consolidate. From the perspective of the sector, driven by the Labour Day holiday, the consumer market continues to heat up. The business activity index of the railway transportation, air transportation, accommodation and other sectors related to long-distance travel has been above 65.0 for two consecutive months, the sectors have maintained a relatively high degree of vitality recently,” said senior NBS statistician Zhao Qinghe.
“The business activity indices of the retail, catering, culture, sports and entertainment sectors that are closely related to household consumption are all higher than the previous month, and are far above 58.0, the consumer market is showing a positive recovery trend.”
