China - Services-manufacturing gap closes

China Macro: Manufacturing PMIs improve in August

China’s PMIs for August published over the past couple of days bring some signs of stabilisation, with the manufacturing PMIs surprising to the upside. For the first time since February, both manufacturing PMIs published by NBS and Caixin picked up from the previous month. The biggest positive surprise came from Caixin’s PMI, which rose by almost two full points to 51.0 (July: 49.2, consensus: 49.0). The official manufacturing PMI published by NBS also came in stronger than expected, but at 49.7 (July: 49.3, consensus: 49.2) remained slightly below the neutral 50 mark separating expansion from contraction. The PMI survey from NBS is larger than Caixin’s one (samples of around 3200 and 650 firms, respectively), and has a stronger focus on the larger state-owned firms, whereas Caixin’s survey focuses more on private and export-oriented firms.

The improvement in China’s manufacturing PMIs was fairly broad-based, with the output and domestic orders components returning to expansion territory in both surveys. This likely reflects the positive impact of ongoing piecemeal monetary easing and targeted support, as well as the fading effects of extreme weather conditions. Meanwhile, the export sub-indices in both surveys improved, but remained well below the neutral 50 mark. The components for input and output prices in Caixin’s survey showed some improvement, in line with our view that producer price deflation will fade further going forward.

The gap between services and manufacturing is closing

Earlier this year, the services PMIs in both the official and Caixin’s survey showed a big jump, as the services sectors benefited the most from the zero-Covid exit initiated in December 2022. As a result, the divergence between services and manufacturing PMIs rose to multi-year highs in the first part of this year. However, with the reopening rebound fading, services PMIs have come down over the past months, and – also with manufacturing PMIs now bottoming out – the gap between services and manufacturing PMIs has narrowed rapidly.

In August, this trend continued, with the official non-manufacturing PMI dropping to 51.0 (July: 51.5, consensus: 51.2). After showing more resilience over the past months, Caixin’s services PMI published this morning also came down sharply in August, falling to 51.8 (July: 54.1, consensus: 53.5). All in all, the composite PMIs (a weighted average of the output indices for manufacturing and services) from both NBS and Caixin were quite stable in August, after having dropped significantly in the course of this year. This is in line with our view that sequential growth will bottom out, on the back of ongoing piecemeai monetary easing and the rolling-out of targeted support, including for the property sector.