China: Lockdowns drive PMIs to two-year lows

China Macro: Impact lockdowns visible in PMIs

Over the weekend, the official PMIs and Caixin’s manufacturing PMI for April were published. The PMIs dropped further below the neutral 50 mark, to the lowest levels since the initial covid-19 shock in Q1-2020. The official manufacturing PMI fell to 47.4 (March: 49.5, consensus: 47.3) and the non-manufacturing PMI to 41.9 (March: 48.4, consensus: 46.0). This brought the official composite PMI to 42.7 (March: 48.8). Caixin’s manufacturing PMI fell to 46.0 (March: 48.1, consensus 47.0). Caixin’s services/composite PMIs will be published coming Thursday. These developments were more or less in line with expectations, as we anticipate April to be the weakest month in China’s current pandemic-driven cycle, both for manufacturing and services. All this clearly reflects the impact of the broadening of lockdowns seen since the second half of March, on the back of the spread of Omicron. This has created heavy headwinds to China’s economic growth and added to domestic supply bottlenecks spilling over to global supply chains (see our Globail Daily on 26 April and our latest Global Monthly for more background).

Bottoming out expected on the back of cautious reopenings

With that said, the drop in China’s PMIs during the initial covid-19 related lockdowns seen in February-2020 was much sharper, although quite short-lived. We expect China’s PMI’s to bottom out over the coming months. In our base case we assume – on balance – a cautious, gradual easing of restrictions in the course of May (within the framework of strict ‘dynamic clearing’ covid-19 policies), although uncertainty remains high and risks are still tilted to the downside. Beijing has just tightened restrictions further, although refraining so far from a full-residential lockdown seen in other major cities such as Shanghai. We also expect further targeted fiscal support (including the stepping up of infrastructure investment) and piecemeal monetary easing. We had already cut our near-term growth forecasts, whereas our annual growth forecast for 2022 is approximately 0.5 pp below Beijing’s official growth target of 5.5%.