Growth in China – One-Time Failure or Policy Error?
China’s cyclical slowdown may have lasted longer. Is it time to expand the policy toolkit beyond proven infrastructure investments?
China activity gauges in the contraction zone
“Miscalibration of policies” was among the main risks mentioned in discussions of China’s cyclical slowdown at the IMF Spring Meetings in DC. The latest activity gauges are likely to fuel these concerns. the official manufacturing Purchasing Managers Index (PMI)1looked weak, falling to 47.4 in April, but the surprising drop in the services PMI to 41.9 (see chart below) shows that the zero-COVID policy is having a disproportionate impact on consumption. Two other details that caught our attention are (1) a sharp shift into the contraction zone of the public enterprise activity gauge (48.1) and (2) a sharp deterioration in the PMI for new export orders ( 41.6). This tells us that the two favorable winds for growth (external demand and state-run manufacturing) which helped a lot during the initial recovery phase could fail and become headwinds to growth.
China has room to manoeuvre, but prefers supply-side stimulus
China has leeway (both fiscal and monetary) to support growth. But the authorities’ emphasis on supply-side measures – while being reluctant to provide more demand-side stimulus – seems increasingly out of place, especially since China does not have an inflation problem. The last Politburo meeting mentioned tax cuts and refunds, as well as policies to help small and medium-sized businesses (to support employment, and therefore consumption), but that almost feels like an afterthought. on infrastructure investments. What would it take for the authorities to reconsider? Did the services PMI drop below 40 in May?
Renminbi depreciation, implications
Chinese growth concerns weigh on the renminbi – The offshore spot exchange rate weakened a further 52 basis points this morning. The rate of depreciation may seem small compared to changes in the prices of other assets. However, the renminbi is the anchor for several other emerging market (EM) currencies (first and foremost in Asia, but not only), and weak exchange rates these days often mean unwanted inflationary pressures. . We’re keeping an eye on the next batch of China’s monetary and credit aggregates next week for signs of stabilization in the housing sector – it’s a well-known fact that housing prices have an impact on consumer confidence. Stay tuned!
Chart at a Glance: China Activity Gauges – Heading in the Wrong Direction
PMI – Purchasing Managers Index: economic indicators drawn from monthly surveys of private sector enterprises. A reading above 50 indicates expansion and a reading below 50 indicates contraction; ISM – Institute of Supply Management PMI: ISM publishes an index based on more than 400 surveys of purchasing and supply managers; in both manufacturing and non-manufacturing industries; CPI Consumer Price Index: an index of the change in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indices that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal consumption expenditure price index: a measure of US inflation, tracking changes in the prices of goods and services purchased by consumers across the economy; MSCI-Morgan Stanley Capital International: a US provider of equities, fixed income, hedge fund stock indices and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows market expectations for 30-day volatility. It is constructed using implied volatilities on S&P 500 index options; GBI-EM – JP Morgan Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by emerging market governments; EMBI – JP Morgan Emerging Markets Bond Index: JP Morgan index of sovereign bonds denominated in dollars issued by a selection of emerging countries; EMBIG – JP Morgan Emerging Markets Global Bond Index: tracks the total returns of external debt instruments traded in emerging markets.
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