China’s Modest Manufacturing Pick-Up Will Not Gain Momentum

THE CAIXIN SERVICES purchasing managers index (PMI) hit its highest level in nearly a year in June at 54.5, following the rebound in the manufacturing PMI to 51.7, its highest level since May 2021, after four months of decline.

A PMI reading above 50% indicates expansion; The Caixin index focuses on smaller and medium-sized firms, while the official PMI tracks larger, typically state-owned companies.

While the easing of lockdowns, including in Shanghai, will have boosted the services PMI, June’s uptick in the manufacturing reading stood in contrast to a slowing of manufacturing output in the United States, the United Kingdom, Japan, India, ASEAN and Brazil, and contraction in the euro-area and South Korea.

However, China’s manufacturers will not be immune to the adverse impacts of the conflict in Ukraine and tighter monetary policies to rein in inflation will erode global market conditions. China’s manufacturing output will slow in the coming months, even if less sharply than elsewhere.

Relatively weak growth will likely continue for the rest of the year in the face of strong external and internal headwinds. These range from worsening US-China tensions to President Xi Jinping’s doubling down on the zero-Covid-19 policy. These are buffeting domestic economic activity, which was already slowing, and global supply chains already under strain.

If China gets away with fewer lockdowns — and softer ones — it should see manufacturing, consumption and investment pick up. There will be continuing monetary and fiscal stimulus to bolster private spending and employment, both critical to the twin goals of growth and social stability.

The risk remains old-school investment spending, which could fuel financial instability, especially in the still beleaguered property sector. The government announced an extra $120 billion of lending for infrastructure by state policy banks at the start of June and a further $80 billion via bond issuance at the end of the month.

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