By Natalia Gurushina, VanEck
Will China’s unexpectedly weak activity gauges lead to a more aggressive policy response?
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There are downside surprises and there are shockers. China’s August services PMI1was the latter. It dived deep into contraction zone (to 47.5 from 53.3 in July) against the expectation of a mild decline to 52.0. The manufacturing PMI also undershot consensus. It did manage to stay in expansion territory – but only barely (50.1 – see chart below). Other details looked bad as well. The new orders PMI moved to contraction zone (for the first time since February 2020), the new export orders PMI slipped to 46.7 (the weakest since June 2020), the large companies PMI moved perilously close to the expansion/contraction border (50.3), and the services new orders PMI collapsed to 42.2.
So, what caused the carnage, and what authorities are going to do about it? The first part of the question is really about how tighter regulations/tech clampdown stack up against “other stuff”. Well, the Delta outbreak in several cities was real, and the ensuing movement restrictions hit services. The same applies to supply chain issues and high freight prices, and their impact on exports and manufacturing. These factors are damaging, but they are likely to prove transitory. In the meantime, we should see more support coming via fiscal and monetary channels (potentially including another cut in the reserve requirements for banks). The regulatory overhaul, however, could be a different and longer-lasting issue – the state media just called it a “profound revolution” – and this raises legitimate questions about its impact on the labor market, income, and consumption, as well as on the private sector investments.
Growth “incidents” like this call for lower local rates – in China. But they are likely to feed growth concerns in the rest of EM. According to the IMF, emerging markets are expected to glow slower than then U.S. in 2021 – for the first time since the 1990s – and the market might not take the idea of further EM growth downgrades lightly. Because it’s not just growth – there’s a host of related issues, including fiscal performance and policy challenges for central banks that deal with rising inflation. Stay tuned!
Charts at a Glance: Sharp Deterioration in China’s Activity Gauges
Source: Bloomberg LP
1We believe PMIs are a better indicator of the health of the Chinese economy than the gross domestic product (GDP) number, which is politicized and is a composite in any case. The manufacturing and non-manufacturing, or service, PMIs have been separated in order to understand the different sectors of the economy. These days, we believe the manufacturing PMI is the number to watch for cyclicality.
Originally published by VanEck on August 31, 2021.