Why you should care
The Chinese manufacturing economy is growing again thanks to government stimulus. But will it last?
Beijing had a clear message to local authorities at the end of last year: Hurry up and build. The flurry of government debt issuance and a boom in infrastructure projects that followed in early 2019 have started to deliver a boost to the economy, lifting sentiment after months of gloomy economic data.
But it is unclear how far the uplift will carry through this year. The flow of credit to businesses in China remains weak and demand for exports feeble even as a trade war with the United States inches closer to resolution. Some economists worry that positive signals from March are a seasonal fluke, and that China’s frothy stock market will eventually experience a deep correction as economic growth slows to a three-decade low.
In its strongest reading since June, China’s official manufacturing purchasing managers’ index at the end of last month marked a return to growth: It rose to 50.5 in March from 49.2 in February, outpacing even the highest expectations for the index. A PMI reading above 50 signals expansion while a reading below 50 indicates contraction.
The survey results offer an early peek at the activity at the heart of the economy — such as factory output and demand for raw materials — but are considered less robust indicators compared with industrial profits, which a week earlier notched the fastest rate of decline in almost a decade. The leading source of fresh growth for March was manufacturing production, a sign that government spending on infrastructure projects was having a noticeable impact on the economy, according to Robin Xing, chief China economist at Morgan Stanley.
We’re a bit cautious about calling this the bottom [for credit growth].
Julian Evans-Pritchard, senior China economist, Capital Economics
“This is a policy-driven rebound,” Xing says. “It’s better than in previous easing cycles because it’s not relying on shadow banking. They are more focused on fiscal policy easing.”
The impact has been felt in infrastructure spending, with the number of power plants under construction increasing, according to Global Energy Monitor, a nongovernmental organization that tracks fossil fuel use.
Approvals for local debt issuance usually come after the weeklong Lunar New Year holiday that lands between late January and late February. But this year, facing a serious economic slowdown, regulators front-loaded those approvals to expedite the building of infrastructure.
In the first two months of the year, gross local bond issuance hit RMB 782.1 billion ($116.5 billion), up from just RMB 28.5 billion for the first two months of last year. Several other new fiscal policies are coming down the line, Xing says. A value-added tax relief program came into effect last week, with the potential to deliver RMB 2 trillion in tax cuts this year.
The fiscal spur represents a change in approach for China.
Policymakers have often attacked economic problems with a flood of credit and a command to banks to lend more, often leading to a spurt of growth but high leverage for companies. Regulators this year are still pushing for more lending but they have not fully opened the credit taps and are focused on helping smaller companies borrow.
“The previous one-size-fits-all deleveraging has now become structural deleveraging and stable leveraging,” says Zhao Xijun, head of the Financial and Securities Institute at Renmin University of China.
Some economists worry the credit supply could still be growing too slowly to support a continued turnaround in other areas of the economy. Total social financing, China’s broadest measure of credit growth, increased by just 10.6 percent year-over-year in February, down from 13.3 percent a year ago.
Conditions in March for small and midsize companies improved from a month earlier but were still contracting, according to the PMI data. Conditions worsened for large enterprises last month. “We’re a bit cautious about calling this the bottom [for credit growth],” says Julian Evans-Pritchard, senior China economist at Capital Economics. “This still points to a further slowdown.”
But challenges to growth remain beyond China’s borders. While Beijing and Washington are closer to an agreement in their trade war, the PMI survey has shown export demand remains weak.
“I don’t think there is any clear sign of external demand stabilizing yet,” says Charles Yuan, a China economist at CICC, the Beijing-based investment bank. “The market was expecting a temporary trade resolution at the end of March but we didn’t get that.”
Many economists, including Yuan, have warned that the Lunar New Year gave March a seasonal boost. By landing in early February, the holiday pushed some economic activity into the third month of the year.
China’s stock market has traditionally been sensitive to signs of an economic slowdown. However, a barrage of gloomy data in January and February did not discourage investors from moving into equities. Chinese stocks have rallied during that time and climbed to their highest level in a year last Monday following the positive PMI news.
Part of the rally has been driven by margin lending, where large shareholders pledge stock for loans and often reinvest. The government is likely to crack down on the activity in the hope of bringing back healthy investment to the market, says Chi Lo, senior strategist for greater China at BNP Paribas Asset Management.
“Froth has come back to the market and that has caught Beijing’s eye because they want to keep it stable,” says Lo. “A lot of investors are waiting for that correction to get back into the market.”
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