Letter From Shanghai No 920 - Improving Sentiment

For a data junkie such as myself, the ten-day data drought ended at 9:30 am this morning as the National Bureau of Statistics published its Manufacturing PMI for June at 50.2 (previous 49.6, expected 50.5) and Non-Manufacturing PMI for June at 54.7 (previous 47.8, expected 51.9), giving us the General PMI for June at 54.1 (previous 48.4, expected 52.3). As 50 is the turning point from expansion to contraction, this is a stellar set of results and underlines the change in sentiment in recent weeks. The non-manufacturing data is particularly interesting as buried within the minutia is “confidence”, which has strengthened to 61.3 from an already positive 55.6 last month. Clearly, manufacturing was a little more circumspect, perhaps already cognisant of fading appetite in China’s export markets.

President Xi was on an inspection tour of Wuhan yesterday, significantly the city where Covid first appeared in 2019. It is also interesting as, at this point, China is significantly retooling its zero-Covid policy response to be more flexible and less heavy-handed. In statements carried by official sources, Xi maintained if China had adopted the “herd immunity” policy or a hands-off approach, given its large population, the country would have faced catastrophic consequences. Xi noted that China’s dynamic zero-Covid policy was formulated by the CPC Central Committee based on the Party’s nature and purpose, as well as the country’s national conditions.

Acknowledging the economic cost, Xi stated, “Even if there are some temporary impacts on the economy, we will not put people’s lives and health in harm’s way, and we must protect the elderly and the children in particular.” Perhaps putting the social cost aside, Xi observed, “If we make an overall evaluation, our COVID-19 response measures are the most economical and effective.” If that is the Beijing mindset, and there is no reason to think that it is not, then we can expect a dynamic zero-Covid policy to be maintained for the foreseeable future.

However, in looking forward, Xi stated, “We are confident in our ability to strike a balance between COVID-19 response and economic and social development and strive for a relatively good performance in this year’s economic development.” As with all China watchers, its possible to dwell on and over-emphasize the smallest detail, but re-reading the phrase “strive for a relatively good performance” seems to indicate Beijing has accepted that Covid this year has presented an insurmountable obstacle and that despite improving sentiment the policy target of 5.5% GDP growth may already be unobtainable.

Have a good day,

John