A lot of hope has been vested in the Chinese recovery, but recent manufacturing data should give investors pause for thought.
- The Caixin China General Manufacturers Purchasing Managers’ Index hit 50 in March.
- Chinese manufacturers cannot be immune from global weakness.
- Credit growth, property sector developments and household spending have all surprised on the upside.
China’s reopening has provided the great hope for the global economy since the start of the year. Economists were optimistically predicting that the country’s return to business as usual in the wake of its zero-Covid policy would be the spark needed to reignite global growth. However, as manufacturing data disappoints, is it panning out as planned?
The Caixin China General Manufacturers Purchasing Managers’ Index hit 50 in March, with Chinese companies reporting softer sales. While 50 is not particularly bad, it is well behind February’s reading of 51.6 and economists’ forecasts of 51.7. It is also not suggestive of a powerful economic recovery in a country where manufacturing is still accounts for around one-third of its GDP .
Chinese manufacturers are facing a number of challenges. First, they cannot be immune from global weakness. The US and Eurozone economies are slowing as higher interest rates bite, which is weakening global demand. Chinese manufacturers are also contending with the same higher input costs as has been seen elsewhere round the globe.
There may also be an impact from the ‘China plus one’ policy pursued by many global companies. Increasingly companies are seeking to diversify their supply chains away from China to ensure they have alternative sources of supply should geopolitical tensions impact production. Manufacturers in Vietnam, India and other parts of the region are all benefiting.
Elsewhere in China’s economy, the signs are more encouraging. Oxford Economics points out that credit growth, property sector developments and household spending have all surprised on the upside. It recently raised its 2023 GDP growth forecast for China to 5.5%. This suggests that China’s recovery is in progress, and there are plenty of pent-up household savings still to be spent.
That said, the other hope was that China’s recovery would spread elsewhere. While there appears to have been a boom in Europe’s luxury goods sector, there has been little sign of beneficiaries in the rest of Asia. Oxford Economics says Vietnam, Singapore and Taiwan have all seen quarter on quarter declines in real GDP in the first three months of 2023.
It is early days for the recovery in China. Western economies took time to adjust to reopening and China will too. Consumers and businesses are only just getting used to being able to work, spend and travel freely. However, investors should not over-interpret the recovery in China. It may not happen fast enough or with enough vigour to counterbalance weakness elsewhere.
