China: PMIs jump in March after the worst slump in history
Chinese official purchasing manager indices (PMIs) in March jumped back into expansionary territory after the worst slump in history the previous month. The official manufacturing PMI came in at 52.0 in March, up from 35.7 in February, and the official non-manufacturing PMI came in at 52.3, up from 29.6 in February. The readings are consistent with our observations of sequential improvement in the Chinese economy after a sudden stop of economic activity due to the unprecedented quarantine measures imposed by the government in response to the coronavirus outbreak.
However, the underlying strength of the rebound may not be as strong as the V-shape suggests at first glance. The economy has not returned to full capacity, be it in the manufacturing or the non-manufacturing sector. A reading above 50 should be interpreted as possible improvement in the economy over the previous month. To make this idea concrete, a PMI reading of 52 means that, on average, 52% of the surveyed companies feel that situations have improved in the current month compared to the previous one, based on the average of the five sub-categories of assessment (the sub-indices).
In the current context, while a reading of 52 points to significant improvement indeed, the underlying strength of the recovery is not as impressive if one takes into account the extremely low base of comparison. It is especially incorrect to take the March figure as evidence showing the manufacturing sector is already stronger than 2019 simply because of its higher numerical value. In fact, the latest high-frequency indicators suggest that the economy has not returned to full capacity, be it in the manufacturing or the non-manufacturing sector.
Looking forward, we expect the Chinese economy to continue to improve through the rest of the year. While weak external demand will likely pose strong headwinds in the near term, additional stimulus from the Chinese government could help boost domestic demand.
A downside risk to our core scenario is the weak external demand caused by the sudden economic shutdown as more countries adopt strict quarantine measures as their coronavirus crises escalate. In response to this risk, the Chinese authorities recently indicated that they would step up policy stimulus to boost domestic demand, including issuance of special Treasury bonds and additional policy-rate and required-reserve-ratio (RRR) cuts for commercial banks. According to our estimate, the fiscal measures announced so far may amount to 4.7% of Chinese GDP and additional measures could be introduced if necessary. For the time being, our Chinese GDP forecast for 2020 remains unchanged at +1.2%.
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