You know things aren’t going well in China when even the official numbers are bad.
Manufacturing and services sector activity decelerated dramatically in April, PMIs released Saturday showed.
Both the official gauges and the Caixin factory gauge were extraordinarily weak, reflecting the impact of lockdowns. The official non-manufacturing PMI plummeted to 41.9 (figure below).
Analysts were openly skeptical of China’s Q1 growth figures which, to some, suggested Beijing may have used the suspiciously robust January-February activity data rollup to set the stage for an above-consensus GDP release.
This is a delicate juncture for the Party, which is at pains to reassure both domestic and international audiences that the economy can meet this year’s targets despite the overhang from COVID lockdowns, an acute property slump and severe regulatory drag. And that’s to say nothing of the challenging external environment.
The new orders indexes were very poor for April (figure below).
The new export orders gauge in the manufacturing survey printed 41.6.
On Friday, the Politburo reiterated a sweeping promise to support the economy and bolster market confidence. Officials succeeded in engineering a stock rebound, but the good vibes may prove fleeting. As one headline put it, describing the mood among the analyst community, “China has to put action behind words.”
March’s otherwise decent activity data was accompanied by a decline in retail sales, and underneath the headline skid in April’s non-manufacturing PMI was an even deeper decline in the services sector business activity index, which fell to 40 (figure below).
The services sector new orders index fell to a truly abysmal 36. Both non-manufacturing employment subindexes were deep in contraction territory.
If you’re curious as to the impact of the lockdowns on logistics, note that the suppliers’ delivery times subindex in the manufacturing survey fell to 37.2. And no, that is most assuredly not because demand suddenly picked up.
The color accompanying the Caixin factory survey was a dark comedy. “Overall, in April, local COVID outbreaks continued, and activity in the manufacturing sector weakened,” Wang Zhe, Senior Economist at Caixin, said, adding that “supply shrank, demand was under pressure, external demand deteriorated, supply chains were disrupted, delivery times were prolonged, backlogs of work grew, workers found it difficult to return to their jobs, inflationary pressures lingered and market confidence remained below the long-term average.”
Other than that, though, things are going fine.
Let’s look in the half-full glass. First, we’re not (most of us) in China facing lockdowns. Second, Xi will crank up the tried-and-true stimulus dials to get growth up, which means construction, which means certain commodities. (Maybe some domestic China stocks too, but I’m not playing that game.)
Walt –
There’s an overriding question I cannot help but ask you and your readers: Where does China go from here?
Ever since I saw Richard Nixon visit China, I have appreciated the steps the Chinese have taken to open up their economy. China has provided useful services for the entire developed world, producing quality goods at a reasonable price – everything from clothing, tools, and machine parts to appliances and cars. Almost everything, basically.
But frankly, over the bulk of time since Nixon, though the Chinese have done some very good things, I’ve had a persistent and unfavorable feeling in my gut. In recent years, what they did to Jack Ma, and other Chinese companies, along with the Chinese property crisis (ghost cities), loudly expressed dominance of the CCP vis-à-vis Hong Kong and Taiwan, and how they have generally managed their internal affairs raises alarms for me. I’m concerned the country’s economy is too much of a black hole. I suspect I’m not the only westerner who has had this gut feeling all along.
As of today, I believe that they are not a reliable partner to supply the US economy. Sinovac has completely failed, and they’re locking down their cities (and factories) as a result. I believe the lack of persistence in the Chinese supply chain is actually a threat to our economy. Inflationary impacts in the US that resulted from the pandemic and the long supply chain to China are set to be amplified by impacts on fuel and food supplies due to the Ukraine war. And in the long term, as I understand it, the Chinese population is expected to drop substantially. And will continue to drop precipitously over this decade and beyond. Lastly, Xi’s affection for Putin is loathsome in the eyes of the world. I’m curious to see how Xi is going to handle that on the world stage as the war evolves.
I know you have your eye on China, and you write about it with some regularity. But I believe the Chinese communists are taking a turn, and not for the better. I feel they’ve been narrowing their view of capitalism for a while, trying to balance it with their particular brand of communism. And the broader set of issues the world is contending with are not helping matters for our relations with the Chinese. I feel that any initiatives in the United States to pull production of products out of China are merited, and should be done as quickly as possible, however it can be accomplished. I believe American business should tend to turn away from China overall. And while it is a substantial market today, I don’t believe it will remain so.
Hope you’re well, sir. I really appreciate the quality of your work, and the volume that you produce – day in and day out. And it’s a great place to share ideas and hang out!
Cheers,
Dave