China - November PMIs show pandemic headwinds intensified

China Macro: Official PMIs drop further, Caixin’s manufacturing PMI edges up a bit – China’s official PMIs for November published by NBS yesterday (30 November) fell deeper in contraction mode and came in weaker than expected, driven by a surge in Omicron cases and the related broadening of lockdowns. The official manufacturing PMI dropped by more than a full point to a seven-month low of 48.0 (October: 49.2, consensus: 49.0). The non-manufacturing PMI, covering the services and construction sectors, even dropped by two points to 46.7 (October: 48.7, consensus: 48.0), illustrating that Zero-Covid is hitting these sectors the most. The official composite PMI, a weighted average of the output subcomponents for both manufacturing and non-manufacturing, fell to 47.1 – the lowest level since the broad lockdown slump earlier this year that had its nadir in April. By contrast, Caixin’s manufacturing PMI published this morning (1 December) came in better than expected, edging up marginally to 49.4 (October: 49.2, consensus: 48.9) although remaining below the neutral 50 mark.

More signals that government starts preparing exit from Zero-Covid – All in all, it is clear that headwinds from China’s strict Zero-Covid policy (combined with new Omicron variants that are highly contagious) have intensified further. The government communicated a 20-point playbook on tweaking Covid-19 policy on 11 November that was aimed at limiting the economic impact of Zero-Covid, just at the time that new cases were starting to rise materially. This created uncertainty at local government levels, who were struck between the goals of reducing new cases and safeguarding economic growth. This weekend, China was faced with unprecedented protests against Zero-Covid, that seem to have subsided for now as the authorities have used measures to refrain the protests from running out of hand. With herd immunity far away due to Zero-Covid, the key to engineer an orderly way out of Zero-Covid is stepping up the vaccination of the eldest and most vulnerable part of the population while strengthening hospital and ICU capacity. What is also needed is a shift of Beijing’s overall narrative and the launch of education campaigns to prepare the population for a different approach. Following the protests, it seems that the sense of urgency to prepare for a relaxation of Zero-Covid has increased. Over the past few days, there are signs of a shift in the official narrative, with the government putting more focus on vaccinating the elderly. All in all, we are currently reviewing our growth forecasts for 2022 and 2023 on the back of recent developments, and will communicate them in our China Outlook for 2023 that will be published next week.