China’s economy opened the Year of the Rabbit with a jump befitting the vigorous Chinese New Year, raising the likelihood of stronger global growth as well as a rise in oil prices. Although the most significant effects of the recovery are expected to be in the second half of 2023.
The January and February PMIs are always worth a look, as they are the few concrete bits of information coming out of China between late winter and early spring. The February PMIs, which were released on Wednesday, are indeed impressive: Caixin’s manufacturing PMI, which is based on monthly surveys and is supposed to provide an indication of the power’s economic activity, jumped to 52.6, the highest number since 2012. Activity in many service industries , in construction, and employment in general are rising sharply.
Nevertheless, there are also some important caveats
First and most glaringly, the big monthly jump — measured by the PMI — still comes after the devastating pullbacks caused by the closings of late 2022. The rebound in the construction PMI likely reflects an increase in infrastructure spending, while local governments are tapping into the designated bond quota for special projects, which is 50% more than last year, according to Capital Economics.
Although a more fundamental indication of construction infrastructure development – the biggest driver of commodity demand – still looks weak. Weekly steel production at the end of February barely matched the February 2022 low, Goldman Sachs showed, but well below 2021 levels. Average daily housing sales in 30 cities also remained well below 2019 and 2020 averages.
The recovery in the services sector – the sector of the economy that received the strongest blow from the zero corona policy – also looks a little less impressive from a closer look. Unlike manufacturing and construction, where employment jumped, the PMI showed that non-construction services continued to shed jobs in February, albeit at a much slower pace.
On top of that, certain measures of robust consumer activity look like the peak is behind them. Traffic congestion and subway use in major cities, as well as daily domestic flights, returned to the bottom end in late February after sharp increases earlier in the year, according to Goldman. Some of these may be seasonal effects related to the end of the Lunar New Year. So it still raises questions, especially when cross-referenced with the service sector employment information.
The main points to focus on now are still housing and employment. If the labor market continues to expand out of manufacturing and construction and into services, that would raise the likelihood of very strong growth in 2023, and a less severe hit to the labor market – especially as exports and factory employment could face strong headwinds later this year if the US and Europe are in an economic struggle. Additionally, a major burst in Chinese commodity consumption still requires a much more stable housing market than the figure, which looks set to take a few more months.