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Beijing Caught Unawares by Weak Survey Data

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2023-04-30

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China’s re-opening boom has stumbled before it got going, judging by the details of the first set of figures for April.

The activity surveys for manufacturing and services both retreated unexpectedly last month and it's no wonder the Chinese government is increasingly worried about the health of the economy.

The surveys for April released on Sunday showed the country’s huge manufacturing sector fell back into a mild contraction, while the service sector saw a clear step down in the pace of activity.

The reports help explain why global commodity prices mostly faded over April with iron ore down 17% or more, copper off 5.7%, oil went easing, coal prices down, along with gas prices.

Australian and other investors tend to ignore these surveys from China but April’s figures add flesh to growing concerns about the health of demand for our key commodities and the share price values of major companies like BHP, Rio Tinto, Fortescue Metals, Woodside and Santos.

For the official state media to publicise the meetings last week of the State Council and then the Politburo and to provide details of the final statements and discussion in official media, underlined the growing concern about the economy.

State Council on Tuesday discussed a sharp fall in demand, especially for exporters and singled out exports of New Energy Vehicles such as battery powered EVs as the spearhead for a boost to exports.

Friday saw the Politburo, the top Communist party body hold similar discussions, with a concentration on the promotion of EV production and exports, but also clear signs of concerns about the health of the wider economy, especially demand (a strong hint that next week’s April trade and inflation data and then the domestic economic data the next week, will not be good).

A state media translation of the final statement from the Politburo said “At present the positive turn in China’s economy is primarily one of a recovery. Internal drivers still aren’t strong, and demand is still insufficient."

“Economic transformation and upgrade faces new resistance, and the promotion of high quality development still needs to overcome many difficulties and challenges,” the readout said.

The Politburo meeting also specifically called for further development of new energy vehicles, the construction of battery charging stations and the transformation of power grids - echoing comments from the State Council meeting three days earlier.

Sunday saw those concerns become very real with the China’s National Bureau of Statistics (NBS) release of activity surveys for manufacturing and services for last month.

While the composite measure (which combined manufacturing and services) was still positive in April, it fell to a reading of 54.4 from a record high of 57.0 in March as factory activity contracted following growth in the prior three months due to slack global demand and persistent property weakness.

While the service sector expanded at a softer pace of 56.4 from 58.2 (a 12-year high) in March, the NBS said the global situation was still complex and volatile and that domestic demand remained insufficient with the foundation for the country's recovery not yet solid.

The slide in the NBS Manufacturing survey was the big shock as no one had forecast the unexpected large fall to a four-month low of 49.2 in April from 51.9 in March, missing market estimates of 51.4.

It was the first contraction in Chinese factory activity since last December and was blamed on weak global demand.

What stood out in the statements from the State Council and then the Politburo wasn’t the references to exports and weak orders, but the clear feeling that domestic demand is not as strong as thought and ’something must be done’ without any mention of added monetary stimulus.

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