China - June PMIs confirm ongoing supply-demand imbalances

China Macro: Divergence between both manufacturing PMIs continues

China’s purchasing managers indices (PMIs) for June published this morning and during the previous days still give a mixed picture about the strength of the economy. This mixed picture starts with the ongoing divergence between the two manufacturing PMIs for China. Following a short-lived improvement seen just after the Chinese Lunar New Year period, the official manufacturing PMI published by NBS had fallen back below the neutral 50 mark separating expansion from contraction in May, to 49.5, and stayed at this level in June (in line with consensus expectations). By contrast, Caixin’s equivalent for the manufacturing sector picked up further in June, reaching a ‘record high’ of 51.8 (May: 51.7, consensus: 51.5). That means that the gap between the two manufacturing surveys came out at a new high of 2.3 points in June.

This divergence illustrative for weak domestic demand/oversupply

What is driving this divergence? Note that the official PMI survey is larger (3,200 firms), and has a stronger coverage of large, state-owned companies, while Caixin’s survey (650 firms) is more focused on private, export-oriented firms located in the coastal regions. Looking at the various subcomponents of both surveys, Caixin’s current ’outperformance’ is broad-based, as this survey shows significantly better outcomes on the subcomponents for output, new orders and export orders. Still, the divergence is clearly the strongest for the output component (Caixin 54.6 versus NBS 50.6). Hence, it seems that the divergence between the two manufacturing PMIs is a bit symbolic for the current state of the Chinese economy: weak domestic demand and excess supply available for exports. Against this background, it is not surprising that export-oriented firms (which have a larger share in Caixin’s survey) do relatively well. That said, as mentioned in previous reports (including our June China Monthly, Between Beijing, Brussels and Berlin), external headwinds are building, as China’s overcapacity is contributing to a broadening of trade spats, particularly in strategic sectors such as EVs and other sectors related to the energy transition. Perhaps illustrative for this: the export order components have come down over the past months in both surveys.

Caixin’s services PMI sharply down in June

China’s two services PMIs also continue to show divergence, but they showed a similar direction in June: downward. Caixin’s services PMI published earlier this morning came in much weaker than expected, falling by almost three full points to an eight-month low of 51.2 (May: 54.0, consensus: 53.4). Earlier this week, the official non-manufacturing PMI (which covers the services and construction sectors) dropped to a six-month low of 50.5 (May: 51.1, consensus: 51.0). This was driven by a further weakening in construction, with the subindex for construction having dropped by four points in the past two months (to 52.3 in June). Meanwhile, the official subindex for the services sectors dropped further towards the neutral mark, coming in at a five-month low of 50.2.

All in all, the two composite PMIs (weighted averages of the output components in the manufacturing and non-manufacturing surveys) came down in June. Caixin’s composite PMI dropped by 1.3 point to 52.8, equal to the April reading (May: 54.1), and the official composite PMI fell to a six-month low of 50.5 (May: 51.0). All in all, the June PMIs paint a picture of an economic recovery that is still imbalanced and led by the supply side, with domestic demand dragged down by the property sector downturn. We still expect sequential GDP growth to slow in Q2-24, following an above-trend pace of 1.6% qoq in Q1, but annual growth to accelerate to ±5.5% yoy helped by base effects from last year.