China’s purchasing managers index (PMI) data released on January 31st indicates a marked improvement in economic activity, with readings for manufacturers (50.1) and services businesses (54.4) both in expansionary territory (figures above 50 indicate expansion compared to the previous month). The numbers are higher than market consensus, which expected a narrower contraction compared to December 2022.

Why does it matter?

The sharp rebound in the PMI readings imply that the economic impact of the rapid reversal of China’s covid‑19 policy has been more transitory than we expected. Therefore, our forecasts of the recovery path will be adjusted to reflect a full-scale rebound from mid‑first quarter of 2023 (instead of from the second half as previously anticipated). According to the Chinese Centre for Disease Control and Prevention, the recent wave of infections was close to an end and did not experience a rebound during the Spring Festival holidays (January 21st‑27th), even when intra‑country migration surged. This led to an explosion of dining, hospitality and tourism activity during that period, which affirmed the aforementioned outperformance of services PMI. It is important to note, however, that we remain of the opinion that the likely absence of large-scale fiscal stimulus and weak household financial positions will limit the extent of growth this year.

The upswing was primarily driven by a rebound in domestic orders, as the reopening unleashed pent‑up demand accumulated during covid-related restrictions and through pro‑growth government stimulus. The new orders sub‑index of the manufacturing PMI, a barometer of demand for manufactured goods, rose to 50.9, from 43.9 in December 2022, even as the export orders (46.1, from 44.2) posted much narrower improvements. The recovery in the production sub‑index, a supply-side indicator, was also relatively muted (49.8, from 44.6). However, the swift comeback of demand is set to revive production in the coming months, especially as workers return to factories after the Spring Festival. 

What next?

Different levels of governments have signalled a supportive approach to the economy right after the Spring Festival break, deploying credit easing, tax breaks and improvements to business environments. Given these, along with the quicker than expected infection-induced immunisation, we will revise up our forecasts for sequential GDP growth in the first and second quarters, from 0.9% and 1.2% respectively. 

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