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China's post-lockdown rebound continues

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China Macro: Official PMIs June confirm rebound from lockdown slump.

China Macro: Official PMIs June confirm rebound from lockdown slump

In line with our expectations, China’s official PMIs for June published this morning brought more evidence that the rebound from the lockdown related slump (with the nadir in April) has continued, with supply disturbances in production and transport fading and mobility improving. The manufacturing PMI rose to 50.2 (May: 49.6). Although that was a bit below consensus expectations (50.5), it was the first time since February that this index was back above the neutral 50 mark separating expansion from contraction. The official non-manufacturing PMI, covering the services and construction sectors, actually jumped by seven points to a thirteen month high of 54.7 (May: 47.8) – significantly above consensus expectations (50.5). As a result, the official composite PMI rose by almost six points to 54.1, also the highest reading since May 2021. Caixin will publish its manufacturing PMI on Friday 1 July and its services and composite PMIs on Tuesday 5 July.

The sharp improvement of the non-manufacturing PMI, in particular, reflects the containment of Omicron and the subsequent easing of the overall lockdown intensity over the past few months, although Shanghai and Beijing are still a bit lagging. China’s overall strict Covid-19 policy (with an evolving practice ‘towards mass testing and mini lockdowns under dynamic clearing’) remains in place. This was confirmed earlier this week by statements from China’s president Xi Jinping. At the same time, official communication has made clear that Beijing is trying to finetune these policies, to minimise the related economic fall-out. All in all, the developments are in line with our base case of a gradual reopening. This – together with the combination of targeted fiscal policy, piecemeal monetary easing and a relaxation of macroprudential policies including for real estate – should help growth momentum to improve in 2H22 compared to a weak second quarter. In that sense, China can function as some form of a counterweight to the expected slowdown in key developed economies (see our June Global Monthly here). That said, as we laid out in our China Monthly update, China’s rebound is still rather unbalanced and led by the supply side, as strict Covid-19 policy has left its mark on consumer confidence and consumption.