China - June PMI

The PMIs rose in June, but the neither the size of the improvement nor the details of the surveys suggest that the economic recovery out of Covid will be particularly strong.

The June PMIs bounced, but neither the headline improvement nor the details were particularly strong. The Caixin manufacturing PMI rose from 48.1 in May to 51.7 in June, but the official version, at 50.2 this month from May's 49.6, only barely got above the 50. New orders in the official PMI also only rose to 50.4, and that was all because of an improvement in export orders. The input price measure in the manufacturing PMI softened to 52, which while still above 50, was the weakest since April 2020. The 6M outlook for manufacturing remains near the lows of the last couple of years.

Non-manufacturing looks stronger in the short-term, which isn't a surprise given it was the main casualty of the Covid-19 lockdowns. The services PMI increased sharply, from 47.1 in May to 54.3 in June, and at a bit over 61, the 6M outlook for non-manufacturing overall was quite strong. But employment, at 46.9, was soft, and the construction PMI in June remained depressed compared with the last few years.

Data for June won't capture all the natural bounceback in the economy that will occur as the Covid-19 lockdowns end. So there will be room for the PMIs to improve further in July. Furthermore, with input prices, like output prices, falling back in June, the outlook for real economy inflation remains tepid. Separate data today from the China Index Academy show real estate price inflation was also very soft in June. From this perspective at least then, there is room for looser policy so support growth, something that has been promised by Xi Jinping.  

Still, it does feel like that policy support will be needed to turn what seems likely to be a modest recovery in growth into something which is more vigorous. The one area which looks like a bit of a wild card for the economy is real estate, because housing transactions have finally started to pick-up, which is important given policy towards home-buyers is very loose. But the recovery in real estate has disappointed for a few months now, and market pricing suggests developers remain under considerable financial pressure.