China’s Economic Recovery Picks Up Further Momentum

Date: Tuesday, June 30, 2020
Source: The Wall Street Journal

Official measure of manufacturing activity climbed to a three-month high in June.

BEIJING—China’s economic recovery picked up steam in June as exports and services benefited from government support policies and the reopening of some overseas markets, official data showed.

The world’s second-largest economy remains far from a full recovery. However, economists say a series of recent signs of increased economic momentum points to China recording positive growth in the second quarter. That follows a sharp contraction in the first three months of the year, when much of the country was locked down to combat the coronavirus.

China’s official manufacturing purchasing managers index climbed to a three-month high of 50.9 in June from 50.6 in May, the National Bureau of Statistics said Tuesday. The separate nonmanufacturing PMI, a gauge of services and construction activity, jumped to a seven-month high of 54.4, from 53.6 in May.

June’s readings came in better than economists’ forecasts and suggested a durable and broad-based improvement in China’s economy. Both indexes have now logged four consecutive months of readings above 50, indicating expansion. Readings below that level indicate contraction.

“China’s economic recovery is showing signs of acceleration,” said Zhang Liqun, an analyst with the China Federation of Logistics & Purchasing, which released the indexes in conjunction with the statistics bureau.

Even so, despite an improvement in the headline reading and the subindex for total new orders—to 51.4 in June, from 50.9 the previous month—the recovery in demand still lags behind production, leaving some questions about the sustainability of the rebound, Mr. Zhang said in a statement accompanying the data release.

Measures of exports and imports both remained in contractionary territory, though they improved further off their post-pandemic lows. The new export orders subindex, a gauge of external demand, improved to 42.6 in June from 35.3 in May, while the subindex measuring imports also increased, to 47.0 from 45.3 in May.

While Chinese exports had benefited earlier this year primarily from production of medical equipment to fight the coronavirus, exports of other types of goods have recently joined the recovery, said Fan Lei, a Shanghai-based economist for Sealand Securities.

The sunnier outlook for China has prompted many economists to raise their forecasts for the country’s economic growth during the three months ended Tuesday. This comes after the previous quarter’s 6.8% contraction in gross domestic product—China’s first quarterly pullback in GDP in more than four decades.

Nomura economists recently bumped up their forecast for China second-quarter GDP growth to 2.6%, from 1.2%, though they also lowered their outlook for the second half of the year. In a note Tuesday, they warned clients that a cluster of new infections that emerged in Beijing in mid-June hadn’t been fully reflected in the data and could curb the pace of recovery in the services sector.

In a sign of such strains, the employment subindex of the manufacturing PMI edged down to 49.1 in June from 49.3 in May, an indication of lingering pressures in the labor market.

Another factor behind the improved economic forecasts is the domestic policy outlook. Extremely accommodative measures adopted earlier this year have helped boost homebuying demand, which should further bolster the current recovery momentum, said Mr. Fan of Sealand Securities. He said he doesn’t expect China’s ultraloose policies to persist for much longer, but added that there is little appetite among policy makers for any significant tightening given the still-sluggish growth rate, which isn’t high enough to support job creation.

Concerns about the coronavirus’s persistence in Europe and the U.S., which are among China’s biggest overseas markets, are another reason for Beijing to remain vigilant.

“The epidemic in Europe and the United States is not really over, and China’s imports and exports are not yet being restored,” said Iris Pang, chief economist for Greater China at ING Bank NV in Hong Kong. She said the services sector could struggle to mount a meaningful recovery by year’s end.

At a public forum in June, Yi Gang, the governor of China’s central bank, signaled caution about the economic side effects of coronavirus-related easing policies, saying that the measures would eventually be unwound.


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