China PMI Rebound and More State Intervention
Bottom Line: The February manufacturing and non-manufacturing PMI were better than expected, as China’s economy reopened from the lifting of the zero COVID policy. We maintain a forecast of 5.8% for 2023 GDP growth. Additionally, president Xi has signalled more political intervention in the economy, which could help 2023/24 growth but may mean less productivity growth long-term.
Figure 1: China Manufacturing and Non-Manufacturing PMI (Index Level)
Source: Datastream/Continuum Economics
China NBS manufacturing rose to 52.6 from 50.1 in January, as the lifting of zero COVID policies helped business to operate more normally – Caixan manufacturing also rose to 51.6 from 49.2. The pick-up in the non-manufacturing sector was greater with an above expectations jump to 56.3 from 54.4 in January. So far the rebound is better than the PMI rebounds after the first COVID wave was controlled in 2020. Momentum will likely accelerate into Q2, as China population has been quick to adopt an endemic COVID policy and this likely bodes well for consumption services in the spring and summer. The February retail sales and industrial production should echo this improvement when they are released on March 15. We maintain our forecast of 5.8% growth for 2023 (here).
Meanwhile, president Xi in an important speech indicated that China would exert more control over science and technology; step up party building work in private companies and industry associations/chambers of commerce. Details should be seen in the national party congress starting March 5. For 2023 and 2024 this could mean more forceful government intervention to get the economy back on track. Multi-year such intervention fits with state socialism and also domestic resilience (given strategic competition with the U.S.). This does not bode well for a pick-up in productivity, which is required in the second half of the 2020’s to counteract the stalling of labor force growth and sustain GDP growth. We await further details, but our initial reaction is that this will reinforce the prospect of trend growth slowing to 3-4% in China in the late 2020’s.