Home

Covid Redux Unfortunate Timing for Chinese Economy

PUBLISHED

2023-05-31

Content

The Chinese economy continued to stumble in May with surveys of the country’s huge manufacturing and service sectors both showing another month of slowing levels of activity.

For the manufacturing sector, it was a dip deeper into contraction for a second successive month in May after April’s surprise drop.

The official National Bureau of Statistics survey unexpectedly fell to a five-month low of 48.8 in May of 2023 from the surprise 49.2 reading for April, missing market estimates of 49.4.

China’s official non-Manufacturing survey (for services) still grew in May, but at a slower expansion pace of 54.5 from 56.4 in April.

While the May reading was the fifth straight month of expansion in services activity it was the slowest pace since January.

Falls in both measures saw the composite activity survey from the National Bureau of Statistics drip to a reading of 52.9 in May from 54.4 in the previous month.

That was the lowest figure since January and confirms the economy remains sluggish and is being slowly dragged to a cliff edge.

“China’s economic prosperity has receded and the foundation for recovery and development still needs to be consolidated,” said NBS senior statistician Zhao Qinghe was quoted by local and western media as saying after the data was released.

Inflation data next on Friday week will add further confirmation with consumer prices barely growing at an annual rate of 0.1% (on the edge of deflation and certainly being hit by disinflation) and producer price inflation falling at an annual rate of 3.6%.

Next week's trade data for May will be of usual interest but the slide in the pace of domestic activity, especially housing, and rising you unemployment are now the major problems for the government and businesses.

China faces a conundrum - the initial optimism about the positive impact of its re-opening lasted longer among credulous western analysts and economists than with many inside China but now there’s general agreement that there has been no re-opening burst and with another round of rising Covid infections gripping parts of the country (led by Shanghai, for a second year in a row), there’s no expectations of any significant improvement any time soon.

While China's manufacturing sector saw an initial boost in the first quarter after the lifting of anti-COVID measures, readings for April showed that this momentum was running out of steam. The sector is being whacked by a steady slowdown in local and overseas demand, amid worsening economic conditions.

In Hong Kong, the belief of the China re-opening boost has faded and the Hang Seng index yesterday dipped to 20% below its January peak – what is considered a technical bear market.

The Hang Seng China Enterprises index, which measures the 50 largest and most liquid mainland Chinese companies listed in Hong Kong, has already dropped 21% from its January peak.

Falling commodity imports, even prices at near recent lows (which Chinese buyers usually use to rebuild stocks) have not attracted extra volumes. If anything, China has trimmed imports of coal, gas, oil, copper and iron ore.

Coal prices at Newcastle, the major pricing port in the world for thermal coal, have fallen to multi year lows in the past month, even as a hotter than expected Spring in northern Asia boosts electricity demand.

Iron ore prices fell under $US100 a tonne for 62% Fe fines last week, rose back above $US100 a tonne and then fell back under that level on Tuesday and Wednesday thanks to falling profits and easing demand.

Wednesday's official manufacturing survey covers large scale, state-owned firms. Today’s (Thursday) Caixin survey covers smaller, private firms and after its shock slide into contraction with a reading of 49.5 in April, from 50 in March and a forecast of 50.3. Analysts are not expecting any major rebound.

Official data out earlier this week showed unemployment in the key 16 to 24 age group had risen again in April to 20.4%. The National Bureau of Statistics data showed that was a record high and nearly four times the overall jobless rate of 5.2%.

Industrial company profits fell 20.6% over the January-April period, with employment weakening as well in both services and manufacturing, according to yesterday’s activity surveys.

The Chinese currency slumped to new six-month lows over the past week as traders grew more uncertain over an economic rebound this year. Some western analysts claim the currency is being allowed to fall to boost flagging Chinese exports and inject more inflation into the domestic market.

But the strength of the US dollar, despite the debt ceiling problems, is the main driver of the weakening yuan and a belief that the Chinese economy is sliding lower.

Author