By Wei Hongxu*
The PMI index released by China’s National Bureau of Statistics sometime ago indicates a downward trend. Figures of the PMI show that in March, then indices of the manufacturing purchasing managers, the non-manufacturing business activities and the composite PMI output were at 49.5%, 48.4% and 48.8%, down 0.7, 3.2 and 2.4 percentage points respectively from the previous month. All these three indices have dropped below the critical point, suggesting that China’s overall economic prosperity level has begun to steadily decline. This, in fact, signals the country’s economic growth is still under enormous pressure, and that the outlook for it in the first quarter is not exactly a bed of roses.
ANBOUND’s analysis on China’s economic data between the months of January and February shows that the rebound of its domestic economy in the first two months would not be sustainable. The overall economic growth in the country is still, therefore, “low in the beginning, high in the end”. This essentially means the trend is gradually moving towards a “soft landing”. Although industrial production, consumption, and investment in January-February have all performed rather well, on the one hand, this is the response of the overall economy under the introduction of the cross-cycle adjustment policies since the end of last year. In reality, the recovery of the country’s domestic economic driver remains insufficient. Speaking beyond the scope of the data, the real situation in SMEs and end consumption is not as optimistic as expected, or could even be worse. With monetary policy on hold and financial support still lagging since the beginning of the year, it is difficult for macro economy to reverse the process of bottoming out.
The PMI for large enterprises in March was at 51.3%, that is, 0.5 percentage points lower than the previous month, and 1.8 percentage points higher than the overall manufacturing industry. The PMI for medium-sized enterprises was at 48.5%, which was 2.9 percentage points lower than the previous month and had in fact fallen to the contraction range. The PMI for small businesses was at 46.6%, which is continuously sitting below the tipping point. This is basically in line with the ongoing pressure faced by the terminals and small and medium-sized enterprises under the impact of the ongoing COVID-19 pandemic. In addition, some surveyed enterprises reported that due to the current outbreaks, there are multiple issues playing up. These include insufficient personnel on duty, poor logistics and transportation, prolonged delivery times, and other supply chain problems. All of these are the main factors causing the downturn of the economy. The situation in the service industry is also somewhat similar. Sectors involving in larger number of people in closer contact, such as railway transportation, air transportation, accommodation, and catering have all been greatly affected by the pandemic. As a result, their business activities have decreased significantly. The business activity index has dropped by more than 20.0 percentage points, and enterprises in general are facing mounting pressures. However, the business activity index of some industries such as telecommunications, radio, television, satellite transmission services, monetary and financial services are in good shape, thus doing well at above 60.0%.
The drastic changes in the situations across the world in March have also had a significant impact on China’s domestic economy: Firstly, the intensified geopolitical risks brought about by the conflict between Russia and Ukraine have caused sharp fluctuations in the energy and commodity prices. This has not only increased supply chain tensions such as the supply of raw materials, but also caused volatility in China’s capital market; secondly, the pressure posed by China’s COVID-19 prevention and control measures has increased, with some major economic regions of the country such as Shenzhen and Shanghai implementing implement “static management”. This not only has a huge impact on the local economy, but also affected related regions and sectors accordingly, which exerts pressure on the country’s economy as a whole.
Based on its objective judgment on the economic situation, ANBOUND has repeatedly emphasized the need for sustainability and continuity of macroeconomic policies. We believe that under the trend of “low in the beginning, high in the end” growth, monetary policy needs to be kept loose to maintain continuous support for the economic demand. The recent State Council executive meeting on the economic situation indicates that such a view is a consensus at the policy decision-making level. The meeting mentioned that the current international situation is becoming more complex and severe, and due to that the downward pressure on the Chinese economy is increasing. It is, therefore necessary to place the objective of stable growth in a more prominent position, coordinate it systematically, adjust the structure, and push for reforms. The meeting had also deliberated that policies to stabilize the economy should be released as early as possible, while measures that are not conducive in stabilizing the market expectations should not be introduced. It should also be noted that the formulation of specific plans to deal with the greater uncertainty must be undertaken the earliest time possible. Different from the previous understanding that China’s economy is showing early improvements, relevant authority in the current decision-making process now proposes that “it is necessary to anticipate and prepare in advance for a worse situation”. With the economy facing stiff challenges, the realization of stable growth requires continuous, healthy policy support.
The People’s Bank of China (PBoC)’s monetary policy meeting in the first quarter of this year has pointed out that the current domestic economy in China is facing the triple pressures of “shrinking demand, disrupted supply, and weakening expectations”. Therefore, it would be necessary to strengthen the country’s cross-cycle and counter-cyclical adjustment. In addition, the PBoC also suggests that it would be indispensable to increase the implementation of prudent monetary policy, and give full play to the role of monetary policy tools. With the dual functions of total volume and structure, China’s structural monetary policy tools should actively aim at precision efforts, while taking the initiative to respond to the challenges. Changes in the content of these monetary policy meetings, in fact, are in consistent with the State Council executive meeting’s judgment on the economy.
Researchers at ANBOUND are of the opinion that under the downward pressure on the economy, the possibility and feasibility for monetary policy adjustment in the second quarter is increasing. The PBoC may improve financial supply from both the supply and demand sides through both structural and aggregate policies. On the one hand, as mentioned in the central bank’s policy of promoting financial services to support rural revitalization, it will expand the scale and implementation of relevant structural financial instruments, and likely to continue promoting small and medium-sized banks to engage in related businesses so as to reduce the deposit reserve ratio. This is also done with the objective to achieve the policy goal of tilting financial resources towards small, medium and micro enterprises and to the green economy sector. In terms of aggregate policy, under the requirement for the promotion of the stability of increasing credit growth, moderate easing will continue to be implemented, along with comprehensive RRR cuts and policy interest rate reductions in stages.
The economic downturn is likely to worsen, if monetary policy fails to “prepare for the rainy day” in February and March this year to provide sufficient support. Though an increased support in terms of macro policies will not necessarily lead to a rapid stabilization and rebound of the economy, the possibility of a “hard landing” has to be avoided. Under these circumstances, it would be necessary as well as urgent for the monetary policy to increase further easing in the future. With the Federal Reserve pushing the pace of interest rate hikes and accelerating policy tightening, the space and time for China’s moderate easing policies are facing constraints.
*Wei Hongxu, A researcher at ANBOUND, graduated from the School of Mathematics at Peking University and has a PhD in economics from the University of Birmingham, UK