China - August PMIs point to ongoing headwinds

China Macro: August PMIs a ‘mixed bag’

The August PMIs for China published so far (official PMIs yesterday and Caixin’s manufacturing PMI today) were a mixed bag. On the manufacturing side, the official PMI rose by 0.4 points to 49.4 (July: 49.0, consensus: 49.2), although staying below the neutral 50 mark separating expansion from contraction. While the official output component was stagnant at 49.8, the domestic and export orders components improved but also remained below the 50 mark. By contrast, Caixin’s manufacturing PMI dropped by almost a full point to 49.5 (July: 50.4, consensus: 50.0), with the output and orders components all deteriorating. Compared to the official one (which focuses on larger, state-owned firms), Caixin’s survey has better coverage of private and exporting companies. All told, renewed Omicron flare-ups and related restrictions (under the policy of ‘dynamic clearing’, with mass testing and mini lockdowns) and regional power shortages (caused by extreme drought this time, not by climate-related policies like a year ago) continue to form drags for manufacturing, as was also illustrated by China’s activity data for July.

Meanwhile, the official non-manufacturing PMI, which captures activity in the services and construction sectors, fell back to 52.6 (July: 53.8, consensus: 52.3), after having shown a sharp rebound in May/June following the lockdown slump in March/April. Property sector woes did likely contribute to the 2.7 points drop in the sub-index for construction, although at 56.5 this component remains at relatively high levels, reflecting a surge in infrastructure spending as one of the elements of Beijing’s support policies. The official composite PMI (a weighted average of the output components for manufacturing and non-manufacturing) dropped to 51.7 (July: 52.5), a three-month low.

All in all, the August PMIs clearly show that China’s post-lockdown slump rebound is being constrained by headwinds from Covid-19 policy, property sector distress, power shortages and a slowdown in global growth. Policymakers have reacted by resuming piecemeal monetary easing and stepping up broader support, including for real estate – see our recent monthly China update for more background.