Our take on China's upcoming PMI: Expect weaknesses to persist
While the Chinese economy has staged a V-shaped recovery in 2020 thanks to the effective containment of the pandemic as well as fiscal stimulus, the newly announced travel restrictions during Chinese New Year do not bode well for consumption in the first months of the year. More generally, the concern about the pandemic and renewed uncertainties have been well reflected in the weakening of business sentiment globally, but also in China. Within this context, our forecast of the upcoming PMI release in January points to a deterioration of sentiment for both the manufacturing and non-manufacturing sectors, and especially for the latter. This comes on the back of a somewhat weaker PMI in December.
The moderation of manufacturing sentiment beyond that of December is somehow inconsistent with the recent improvement of manufacturing investment and the recovery of producer prices. But given the renewed wave of Covid-19 infections, the uncertainty over the length of the new containment measures in China, as well as the slow rollout of mass vaccination are enough reasons for a weakening of sentiment.
The above is all the more true for the non-manufacturing sector, as the fresh round of mobility tightening impacts services even more directly. Even before the announcement of a nationwide cross-region restriction around Chinese New Year, local governments for the affected provinces have implemented the strictest level of social distancing since spring last year. While these measures can help to limit the spread of the disease, they do not bode well for the transportation and hospitality sectors since the Chinese New Year used to be one of the peak seasons for passenger flow. And our indicator does capture a rapid deterioration in sentiment for the transportation sector. Given so, the full recovery of the service sector is set to delay, which has been a major drag on consumption in 2020.
Thai said, the swift responses from government and ongoing vaccine rollout should help bring the situation under control. Moving forwards, risks still consist from the sluggish recovery of consumption as well as the still unclear relation between China and the new US administration.