China - October PMIs signal growth risks

China Macro: Manufacturing PMIs dropped back below 50 mark again

While recent macro data pointed to an improving growth momentum over the summer months, the October PMIs published over the past few days serve as a reminder that headwinds from the property sector woes and the global growth slowdown are still strong. To start with manufacturing, the October PMIs from both NBS and Caixin dropped back below the neutral 50 mark. The NBS survey is larger than Caixin’s one and has a stronger focus on the bigger state-owned firms, whereas Caixin’s survey focuses more on private and export-oriented firms. Notably, September was the first month since February that both manufacturing PMIs were back above the neutral mark again. For October, the official (NBS) manufacturing PMI dropped from 50.2 in September to 49.5 (consensus: 50.2), and its equivalent published by Caixin from 50.6 to 49.5 (consensus: 50.8). The softening was visible on the supply and the demand side, with the subcomponents for output and new orders coming down in both surveys. Remarkably, the export sub-index in the official survey fell back to 46.8 (September: 47.8), while this component in the Caixin survey picked up to a four-month high of 49.3 (September: 49.1).

Services PMIs just above the neutral 50 mark

China’s services PMIs have come down in recent months on a fading reopening rebound, and the gap between manufacturing and services PMIs has narrowed quickly. The official non-manufacturing PMI – covering the services and construction sectors – slid to 50.6 in October (September: 51.7, consensus: 52.0), the weakest reading since the messy Zero-Covid exit in December 2022. Caixin’s services PMI published today picked up slightly, to 50.4 (September: 50.2, consensus: 51.0). China’s two composite PMIs, weighted averages of the output components for both manufacturing and services, both fell to the lowest levels so far this year, although staying just above (NBS) or at (Caixin) the neutral 50 mark.

Targeted support continues

All in all, we believe that Beijing’s annual growth target for 2023 of 5% is within reach, partly reflecting the filtering through of ongoing monetary easing and targeted support. The recent announcement of a plan to issue an additional CNY 1 trn in sovereign bonds signals the central government’s willingness to start sorting out the property-related debt troubles of local governments. Still, the October PMIs are a clear warning signal that the Chinese economy will be faced for some time with headwinds from (amongst other things) the property sector troubles and related debt issues and the global growth slowdown. Coupled with Beijing’s policy shift away from growth maximalisation towards goals related to national security and self-sufficiency, we expect China’s structural slowdown to continue and annual growth to fall below 5% from 2024 onwards (leaving aside one-off ‘cyclical’ corrections) – see our October Global Monthly, Six urgent questions on China, for more background.