China: Strong February PMIs confirm reopening rebound

China Macro: February PMIs confirm rebound is strengthening

China’s February PMIs published this morning all came in stronger than expected, confirming that the rebound following the rapid Zero-Covid exit initiated last December, is broadening and gaining strength. The effect of the abolishment of pandemic-related restrictions is most visible in services sectors such as transport, tourism, eating out and entertainment. Following the stunning rebound last month (from a three-year low of 41.6 in December 2022 to 54.4 in January 2023), the official non-manufacturing PMI rose further by almost two points, to 56.3 (consensus: 54.9), equalling a two-year high. Still, China’s manufacturing PMIs for February also surprised to the upside. The official manufacturing PMI published by NBS rose by 2.5 points to an 11-year high of 52.6 (January: 50.1, consensus: 50.6). Its equivalent from Caixin rose by 2.4 points to 51.6 (January: 49.2, consensus: 50.7), returning to expansion territory. Looking at the various subcomponents, the improvement in China’s manufacturing PMIs was broad-based, with both output and (domestic and external) demand indicators firming.

2023 growth target to be announced at National People’s Congress (NPC)

With both services and manufacturing improving, the official composite output index from NBS rose by 3.5 points to 56.4 (January: 52.9), the highest reading on record (series published since 2017). Caixin’s services and composite PMIs will be published coming Friday. All in all, the February PMIs are in line with our view that – with no major pandemic disturbances following the LNY period – the way is paved for a staged recovery in domestic demand, with quarterly GDP growth accelerating from Q1-2023 onwards. This reflects the fading of headwinds from the pandemic – following Zero-Covid exit – and from easing property distress, with more direct property support filtering through and some early signs of a bottoming out in real estate, at least in the largest cities. That said, headwinds from weaker global demand and ongoing tensions with the US still remain.

More broadly, on top of the U-turn in Covid-19 policy, Beijing’s overall policy stance seems to have shifted towards safeguarding economic growth rather than reducing financial risks or a regulatory crackdown. That shift was highlighted during the Central Economic Working Conference held in December, and we expect further confirmation on this front at the annual NPC that will start this weekend. We expect Beijing to announce a growth target of around 5% at the NPC. We anticipate annual growth will accelerate to 5.2% this year, up from a meagre 3% last year when the Chinese economy was heavily impacted by, in particular, the combination of Zero-Covid/Omicron flare-ups and a property sector slump.