China PMI and the upcoming “two sessions”

China’s National Bureau of Statistics (NBS) reported February PMI data which handily beat already strong expectations and indicated a continued acceleration in economic activity.

The improvement was broad based, with factory data picking up meaningfully after lagging the earlier consumption recovery.

The positive data has provided confirmation of China’s swift rebound on its path to pre-pandemic normality, providing fresh impetus to Chinese equities which lost steam post the Lunar New Year holidays. 

Manufacturing PMI rose to 52.6 from 50.1 a month earlier, the highest reading since 2012.¹

The improvement was led by production which returned to expansion territory for the first time in 2 years.

Notably, export orders showed an uptick despite the slowdown in global goods demand, reflecting the significant slack after 3 years of COVID restrictions in China. Demand broadened while supplier delivery times shortened considerably.

The non-manufacturing gauge also surpassed expectations. Policymakers remarked on the construction sector growth, which was likely infrastructure driven.

Consumption and services showed momentum pointing to sustained “pent up demand” from the reopening.

We continue to expect consumption to be a significant driver for Chinese growth this year.

Chinese households have been accumulating deposits at an accelerated pace since the onset of the pandemic, and we watch to see the full extent to which these excess savings will be deployed. 

The upcoming “two sessions”

All eyes are now on the upcoming “two sessions” political committee and National People’s Congress (NPC) which begin on 5th March, with Premier Li expected to deliver a government work report that will include the 2023 budget and GDP, inflation and fiscal deficit targets.

Equally important, are the appointments of new ministers and potential government agency restructuring plans.

Policymakers are likely to set a GDP growth target of “around 5%” though we believe the economy could exceed estimates.

The recent activity data has been encouraging: in addition to the betterthan expected PMIs, high frequency data such as subway passenger volumes (+32% Jan-Feb y/y) and express delivers (+9.5% Feb y/y) have been robust YTD. February’s hotel occupancy rate was the highest in 10 years.²

Still, the recovery towards pre-COVID cyclical growth isn’t a sure-bet, January’s private credit growth was weak particularly across household loans and mortgages (+4.5% y/y).³

It’s yet to be seen what kind of recovery the all-important property market will experience this year. Thus while we wait for further economic data, aggressive fiscal stimulus measures are unlikely to be announced as the consumption-led recovery still has legs.

From a longer-term impact perspective, we’ll be keeping a close eye on cabinet reshuffle, institutional reforms to overhaul government bodies.

Based on official statements, these changes are expected to be announced during the second week of the NPC and we could see the creation of new “super” agencies to foster technology innovation and better coordinate and regulate the financial industry.⁴ We don’t expect any economic structural reforms to be announced until the Fall of this year.