Shanghai reopening will aid China’s economy, but coronavirus still hanging over services, manufacturing
- The official manufacturing purchasing managers’ index (PMI) rose to 49.6 in May, up from 47.4 in April
- Official non-manufacturing PMI, which measures business sentiment in the services and construction sectors, rose to 47.8 from 41.9 in April
China’s economy showed an initial improvement in May as coronavirus cases dropped and restrictions eased, but manufacturing and services activity remained in contraction, with future recovery still vulnerable, analysts said.
Activity in both sectors increased in May, according to the purchasing managers’ indices (PMI) released on Tuesday, but both readings remained below the 50 mark that separates expansion from contraction.
Within the official non-manufacturing PMI, the construction subindex fell to 52.2 in May from 52.7 in April, while the service subindex rose to 47.1 from 40.
The major uncertainty remains whether the Omicron variant will repeat and how the government will respond, that’s the key concern of the market
“The PMIs below 50 indicate that the economy is still slowing, despite an improved slowing rate,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management.
“Some local governments are gradually improving the efficiency of the logistics system, and this could help the economy take a favourable turn by a small margin.
“In the coming months, the economy is likely to improve, thanks to factors including the reopening of Shanghai, and the PMI will likely rise above 50. But the major uncertainty remains whether the Omicron variant will repeat and how the government will respond, that’s the key concern of the market.”
Within the official manufacturing PMI, the subindex for production rose to 49.7, up from 44.4 in April, with manufacturing activities around the Yangtze River Delta gradually resuming with Shanghai set to lift its lockdown on Wednesday.
Demand also improved as the subindex for new orders rose to 48.2 from 42.6 in April, while new export orders rose to 46.2, compared with 41.6 a month earlier.
“The survey results show that a series of policies recently introduced to smooth out logistics and the blockages in the industrial chains have been effective. In May, the proportion of companies reporting logistic blockages was 8 percentage points lower than last month,” said senior NBS statistician Zhao Qinghe.
“In terms of market expectations, the business activity expectation index is 55.2 per cent, 2.2 percentage points higher than the previous month, indicating an enhanced confidence of service industry companies as the pandemic is effectively controlled and various policies and measures to stabilise growth, market entities and employment have been implemented.”
The recovery is likely to remain tepid amid weak external demand and labour market strains
“The employment subindex recovered only very marginally rose to 47.6 in May from 47.2 in April and has now been in the contraction zone for 14 consecutive months, indicating the easing of lockdowns nationally has yet to translate into any material improvement in the country’s labour market, which was already in a sluggish state prior to the latest Omicron wave,” said the Nomura analysts led by Lu Ting.
“The raw materials inventory subindex rebounded slightly to 47.9 in May from 46.5 in April, pointing to still-weak restocking demand.”
The official composite PMI, which includes both manufacturing and services activity, rose from 42.7 in April to 48.4 in May.
“The official PMIs add to broader evidence that activity has started to rebound as containment measures were rolled back. That said, the recovery is likely to remain tepid amid weak external demand and labour market strains,” said Sheana Yue, China economist at Capital Economics.
“The PMIs probably understate the scale of recovery this month given that the surveys mostly took place prior to when most restrictions in Shanghai were relaxed. High-frequency data suggest that service sector activity has improved since then. We suspect that the hard data due over the coming weeks will reveal a stronger recovery.”
