China’s official Purchasing Managers’ Index for the manufacturing sector came in at 50.9 in June, up from 50.6 in May, with the non-manufacturing PMI rising to 54.4 from 53.6 in May, showing better-than-expected indicators compared to high-frequency data.
Sub-indices for production and new orders also expanded in June, suggesting China’s economic recovery is still on track. Particularly, the New Export Orders Index came in at 42.6, up from 35.3 in May. Taken together, the indices for purchasing, production, demand, inventory and price proved the economy is recovering steadily.
The rebounding real estate construction and sales, the increasing infrastructure projects and the recovering external demand are the three major drivers of the growing economic activities in China. So far, production activities have been back to the pre-pandemic levels. Looking forward, the future development will largely hinge on the strength of the demand recovery.
Three factors need attention here.
First, property projects have not been in their best possible shape. Since the third quarter of 2019, property developers are under pressure to handle previous projects in deliveries. Owing to the impact from the coronavirus epidemic during the previous quarter, developers now need to rush to work to boost construction of projects.
Second, infrastructure projects are vital to boost steady economic growth. With the large-scale issuance of special bonds, local governments have raised more capital to invest in infrastructure. In May, financial institutions raised 1.31 trillion yuan ($187 billion) from new fiscal deposits. With the support of adequate funding and infrastructure projects, local governments will be able to foster steady economic development.
Third, external demand for various products (or goods or commodities) and services is better than expected. As the emerging world becomes the virus epicenter, it leaves a limited impact on China’s exports compared to the previous period. The resumption of work in the United States, the increasing demand for work from home and the coronavirus prevention measures help maintain steady overseas demand.
While China’s economic recovery appears to have picked up steam in June, how long will it last? As the production capacity has more or less reached the pre-outbreak level, the key lies in demand recovery.
Looking ahead, uncertainty continues to shroud economic operations. Here, four factors stand out.
First, the external demand still remains very weak. The resumption of work and production in Europe and the US is the only choice to avoid growth collapses. Some economies such as the US are witnessing surging new COVID-19 cases after the work resumption, suggesting a longer virus fight is likely. Thus, very slow demand recovery is inevitable.
What’s more, the overseas production recovery offers an alternative to purchasing China-produced items. Usually, production will recover faster than demand, which means China may lose some share of global exports due to the resumption of production in other countries.
Second, property developers’ catch-up process may not last long.
On the one hand, developers mainly focus on completing existing projects. The slowing growth of construction areas and the rebound in project completion growth rate also proved that.
On the other hand, we will see limited growth in the number of new property projects. High-frequency data shows the rate of increase in land purchases dropped by more than 41 percent in June.
Housing sales across the nation showed better results than that in 30 large and medium-size cities. The data show obvious recovery of property markets in third-and fourth-tier cities on the back of the release of pent-up demand previously curbed by the coronavirus lockdown.
But it is clear that sustainable growth in housing sales is not assured. Judging from the growth rate of residents’ loans, residents in less-developed regions and third-and fourth-tier cities have used up all the resources for buying properties.
Amid the coronavirus outbreak, the economy and employment in less-developed regions as well as the third-and fourth-tier cities were hit badly.
On the one hand, the novel coronavirus had limited impact on the technology sector, and some segments in the sector emerged as the unlikely beneficiaries of the outbreak. Considering that major tech firms are mainly based in the first-tier cities, it’s hard for the third-and fourth-tier cities with single industrial structure to fend off the risks.
On the other hand, due to the pandemic impact on labor-intensive external demand, demand for labor in coastal cities will decline, which will in turn have a lagged effect on incomes of migrant workers in the third-and fourth-tier cities, thereby weakening their ability to buy homes.
Third, consumption recovery lacks sufficient momentum. In addition to the high leverage that will restrain household consumption during the recovery, the coronavirus impact on different industries and enterprises varies, which will also restrict consumption.
On the one hand, sectors like computer equipment and medical supplies have benefited from the outbreak, while most industries are hurt badly by the epidemic, which will also affect employment and consumption.
On the other hand, while the PMI of large and medium-sized enterprises expanded, the PMI for small companies came in at 48.9 in June, down 1.9 from May. Officials from the National Bureau of Statistics said the proportion of small enterprises reporting a shortage of orders was higher than that of large and medium-sized companies in May.
Considering that small companies create a majority of jobs in China, their current situation means we should be cautiously optimistic about employment and consumption.
The fourth and final aspect is, enterprises still face pressure to reduce their unsold products. The total inventory value of finished products for industrial enterprises jumped by 9 percent year-on-year in May, compared with a 14.9-percent increase in March, but is still at a high level compared with historical data.
Where production resumed and returned to the pre-epidemic levels, if demand fails to return to normal, industrial companies may slow production in the future.
At present, what is for sure is that infrastructure investment is still in an uptrend of the business cycle. But whether or not that investment will continue to boost the economy remains unclear.
The economic downturn, the epidemic’s impact and the slow recovery may last for a quarter. After the pent-up consumption demand and investment wane, the economy may once again face slowing pressure, with a need to guard against the risks discussed above.
The writer is a chief economist for Guangdong-based Yuekai Securities.
The views don’t necessarily reflect those of China Daily.