China - February PMIs bring further signs of stabilisation

China Macro: Manufacturing PMIs continue to show divergence...

China’s PMIs for February published earlier today showed a modest improvement on balance, coming in a bit better than consensus expectations. On the manufacturing side, the index from NBS (the ‘official’ one, with a stronger coverage of large, state-owned enterprises) and its equivalent from Caixin (focussing more on export-oriented and private firms) continue to show divergence. The official manufacturing PMI dropped slightly to 49.1 (January: 49.2, consensus: 49.0), remaining below the neutral 50 mark separating expansion from contraction for the fifth consecutive month. By contrast, Caixin’s manufacturing PMI remained above the neutral mark, picking up a bit to reach a six-month high of 50.9 (January: 50.8, consensus: 50.7).

… with the supply side still stronger than the demand side

Looking at the various components of both manufacturing surveys, a common feature is that the supply side is still stronger than the demand side, as flagged in previous publications. That said, the output component of the official PMI showed a clear drop in February, whereas Caixin’s equivalent remained solid; this possibly reflects differences in the way the effects of the lull in activity during the Lunar New Year break are being captured. More broadly, the fact that the supply side in China remains stronger than the demand side is clearly contributing to trade tensions, with electronic vehicles being the most eye-catching example. A surge in EV exports to Europe already triggered a probe by the European Commission, launched in the autumn of 2023 (see our earlier coverage here and here), and the US has just announced its own investigation and possible countermeasures, pointing to national security concerns.

Official non-manufacturing and composite PMI at a four-month high

Meanwhile, the official non-manufacturing PMI (covering services and construction sectors) came in better than expected, rising to a five-month high of 51.4 (January/consensus: 50.7). The subindex for services improved by 0.9 points to a seven-month high of 51.0. The subindex for construction dropped further to a four-month low of 53.5 (January: 53.9), although remaining clearly in expansion territory. The official composite PMI, a weighted average of the output components in the manufacturing and non-manufacturing surveys, was stable at 50.9. Caixin’s services and composite PMIs will be published on Tuesday 5 March.

2024 growth target to be announced next week

All in all, the February PMIs so far are in line with our view that sequential growth will be underpinned this year by ongoing piecemeal easing and targeted fiscal support, although we still expect full-year annual growth to fall from 5.2% in 2023 to 4.7% in 2024 (also see our recent China Monthly coverage here). Further policy guidance will be given at the ‘Two Sessions’ policy meetings early next week, when the 2024 growth target will be announced. A growth target of ‘around 5%’ would already be quite ambitious, given the remaining headwinds from the property sector and the global environment, and the fact that there is no reopening bonus like in early 2023.