Macroeconomy

Chinese recovery shifts momentum

The recovery in China’s industrial sector seems to be moderating but domestic consumption continues to rebound. On current trends, there could be upside risk to our growth forecast for China.

Normal 0 21 false false false EN-GB ZH-CN AR-SA After a sharp rebound in Q2, the recovery in China’s industrial sector seems to be moderating. The official manufacturing purchasing manager index (PMI) came in at 51.0 in August, a tad softer than the previous month’s 51.1. (While the Caixin (Markit) PMI continued to improve in August, the magnitude of the increase was much smaller than in previous months.) 

 

The recent cooling of momentum in the industrial sector is due to the slowdown in fixed-asset investment growth as the impact of the initial wave of fiscal stimulus on infrastructure spending starts to wane. Recent import data from China provide more evidence of the moderation in the recovery in industrial activities. 

 

China’s exports, however, continued to expand in August. In USD terms, Chinese exports rose by 9.5% y-o-y in August, up from 7.2% in July and 0.5% in June. We expect Chinese exports to remain robust as more countries emerge from lockdowns and demand gradually recovers. While a reconfiguration of global supply chains is a likely scenario in the medium term, China remains the backbone of global manufacturing, especially as corporate capex will likely remain muted in most other parts of the world in the foreseeable future.

 

While fixed investment in China is showing signs of softening, household consumption is improving steadily. Nominal retail sales growth was still negative in July, but the growth in passenger car sales accelerated in August, pointing to further improvement in overall retail sales in August as well.

 

As in many other economies, the recovery of services has lagged behind industry. However, some encouraging signs are emerging. Restaurants and catering services, for example, have staged a sharp rebound after reaching a trough in March. Movie theatres (along with many other entertainment venues) were allowed to re-open in most parts of China in mid-July, leading to a quick rebound of box office revenues from virtually zero to levels similar to the 2018-19 average. Online sales of services, including items such as air tickets, travel packages and gaming, returned to positive growth in July for the first time since December 2019.

 

Services have been playing an increasingly important role in the grand transition of the Chinese economy, and now account for over half of the entire economy (54% of GDP in Q2 2020, to be precise). If the recovery of services maintains its current momentum—which looks possible given the government seems to have the coronavirus quite firmly under control—then our current GDP forecast of 1.8% for China in 2020 could be subject to some upside risk.