For China’s PMIs, July was a month where little changed. Both the official manufacturing and service PMIs edged lower, but remained near long-run average levels. The Caixin manufacturing index held to its long-run average.
In recent updates, we have paid particular attention to the external demand and employment indexes from these surveys. These components are again worth focusing upon.
Versus continued weakness in Korea; Taiwan and Japan, new export orders for Chinese manufacturers were broadly unchanged in July. Meanwhile, service export orders saw a modest improvement.
Given this nascent stabilisation at a below average level, the take home for external demand arguably is that it has softened but is unlikely to fall sharply unless trade tensions escalate materially.
Total new orders continue to point to robust domestic demand. The recent multi-faceted policy easing will help to sustain this momentum.
Crucial for domestic demand is the health of the consumer. This is particularly true of their income prospects.
In the official PMI reports, an improvement in employment was apparent, leaving both series within a percentage point of their long-run average.
Having lagged the activity measures, employment is now showing resilience as production slows. If sustained, this will provide a meaningful offset to the historically soft pulse of business investment and infrastructure spending by local governments.
As was evident in the June quarter national accounts, China’s economy is increasingly coming to depend on the consumer for its marginal momentum. The catch however is that, for robust spending to be sustained, income growth has to be promoted. To do so, authorities’ focus must remain on the industrial sector, specifically the formation and development of new industry which offers long-term growth opportunities. Related to this is the building of stronger trade and financial linkages with the world – with or without the US’ involvement.
