Concerns about China’s economic outlook

China’s economic recovery showed further signs of imbalance, with manufacturing activity contracting for the first time in months while a surge in holiday travel fuels consumer spending.

The China Caixin manufacturing purchasing managers index dropped to 49.5 last month from 50 in March, pointing to a contraction in factory output for the first time since January, Caixin and S&P Global said in a statement on May 4.

That contrasts with strong tourism figures over the five-day Labour Day holiday, with domestic trips surging 19% above 2019 levels before the pandemic struck. However, tourism spending recovered less strongly, indicating consumers have become more frugal. The latest data suggest the economy’s recovery is increasingly patchy, clouding the outlook for growth after a better-than-expected expansion in the first quarter.

China’s rebound is following a similar pattern to other countries after reopening, with demand for goods slowing as consumers increase spending on services like travel and restaurants. There are several other risks as well: The rebound in the property market has only just started, with investment continuing to fall, unemployment — especially among young people — remains high while households are still boosting savings.

“The easy part of China’s post-reopening recovery — which includes the full recovery of mobility and the release of pent-up demand in select sectors — is done,” Goldman Sachs Group economists, including Wang Lisheng, wrote in a report on May 4. “The next leg of the consumption recovery will rely on higher income growth and improved consumer confidence, making the recovery model more sustainable.”

Chinese stocks edged lower on the morning of May 4, with the CSI 300 Index falling as much as 0.7%, weighed down by concerns about an uneven recovery. The lopsided recovery underscores Chinese leaders’ cautious outlook on the recovery and pledge last week to keep monetary and fiscal policy supportive amid insufficient economic demand. This week, a top International Monetary Fund official said China “has the policy space to keep monetary policy accommodative because inflation is very much muted.”

The Caixin PMI report noted domestic demand as a “main drag” on the April manufacturing PMI figures. A subindex for total new orders fell back into contraction last month. “This suggests that China’s economic recovery significantly slowed after Covid-19 infections peaked at the start of this year,” Wang Zhe, senior economist at Caixin Insight Group, said in a statement accompanying the data. “It remains to be seen if the rebound is sustainable after a short-term release of pent-up demand.”

The job market also deteriorated, Wang said, adding that “as market demand remained subdued, businesses trying to slash costs were reluctant to hire more workers, with some even announcing layoffs.”

Growth in in-person services will likely slow down in the coming months as pent-up demand wanes, Nomura Holdings economists, including Lu Ting, said in a May 3 report. “The lacklustre property recovery, a global slowdown and rising geopolitical conflict remain major challenges for China’s recovery to be sustained.” —