Flickers of light are piercing the economic gloom in China. But the flame of growth could easily be snuffed out by the Covid-19 pandemic.
Official figures released by the National Bureau of Statistics on Tuesday showed that factory activity picked up again in June.
China’s Purchasing Managers’ Index, or PMI, edged higher at 50.9 compared to 50.6 in May. The non-manufacturing PMI also increased slightly to 54.4 from 53.6 with a figure above 50 classified as expansion.
“We still face uncertainties. [But] recovery momentum of the manufacturing sector was further consolidated, stimulating related business activities in the service sector,” Zhao Qinghe, a senior statistician at the NBS, said.
Still, a clearer picture of the manufacturing industry will emerge later this week when the Caixin-IHS Markit Purchasing Managers’ Index is released. The report tends to feature a broader mix of small- and medium-sized companies.
In comparison, the official study polls a large proportion of big businesses and state-owned enterprises. Even so, “external demand” continues to be sluggish after remaining in negative territory.
“The foreign orders PMI at 42.6 in June confirms that external demand remains weak. We believe that the ongoing Covid-19 situation in the United States and Europe will keep the pressure on export orders in the coming months,” Iris Pang, the chief economist of Greater China at the multinational banking group ING, said.
“This confirms our view that small manufacturers continue to struggle to get export orders,” she added.
Obviously, this is crucial to the overall state of the economy. SMEs and the private sector as a whole account for around 80% of urban jobs and create 60% of China’s GDP growth.
Getting to grips with spiraling urban unemployment has become a priority. Official data showed it was 6% in April compared to 5.9% in the previous month but down from the record high of 6.2% in February.
Stagnate wage growth and the threat of a Covid-19 second wave are also having a major impact on domestic consumption. Moreover, that was reflected in industrial data released at the weekend.
Profits rose for the first time in six months in May, increasing by 6% to 582.3 billion yuan, or US$82.28 billion, according to the National Bureau of Statistics.
But a closer look at the numbers revealed that private sector profits fell 11% in the first five months. Again, that was a modest improvement from the slump of 17.2% between January to April.
“One of the reasons behind profit growth in May was lower costs, which is a combination of lower energy costs and wages. This highlights that global demand is still weak and therefore energy costs are lower [and that] labor earns less than before Covid-19, which could hurt domestic consumption,” Pang said.
“Another risk is that the core of profits comes from technology-related industries, which is at risk of a possible re-escalation of the technology war between China and the US,” she added.
Apart from a renewed outbreak of hostilities, the world’s second-largest economy is on a different coronavirus cycle after reporting the first official case of the highly-infectious disease in January.
European Union nations are still getting back into the groove, while the US continues to be mired in rising infection rates throughout major states.
Naturally, this does not bode well for China’s export machine amid a challenging environment. First-quarter GDP, for example, contracted by 6.8% compared to the same period in 2019. The last time the economy contracted at such a rate was during “the Cultural Revolution,” historians have claimed.
To complete a bleak outlook, more dark clouds rolled in earlier this week when the influential China Beige Book reported that the situation could deteriorate.
“Until and unless global demand recovers more forcefully, the incremental quarterly improvement just seen will make for a contraction for full-year 2020,” the study based on a survey of more than 3,300 companies said.
“No matter the lens, gains over Q1 are marginal. Services, manufacturing, property, and commodities all saw revenue and profits move into expansion territory,” the report added, pointing out that the data remained around record lows.
How that plays out in the months ahead is open to debate.
A resurgence of new Covid-19 cases in Beijing and surrounding cities during the past three weeks have dealt another blow to the domestic services sector.
Concerns of a second wave or even a “cluster” outbreak would certainly act as a brake on a sustained recovery.
“The momentum could lose some steam in [the] coming months,” Nomura, the Japanese investment bank, said in a note after the PMI statistics were released.
Exports could also take a hit. “[They] look ripe for a pullback despite the improvement in orders,” Martin Rasmussen, of research consultancy Capital Economics, said, adding that demand for virus-related products, such as masks, is likely to weaken.
Like the rest of the global economy, China will need more than flickers of light to weather this perfect storm.