Cooling China Caixin PMIs suggest that “recovery has yet to find a stable footing”

Following the government’s tepid PMI numbers which were released last week, the Caixin China PMIs moderated since May 2023.

Caixin China General Composite PMI

In Caixin’s latest release, the combined gauge of business activity (inclusive of services and manufacturing) slipped from a 29-month high of 55.6 in May 2023 to 52.5 in June 2023.

Although this marked the sixth consecutive expansionary reading, it was the weakest this year, sliding below January 2023 levels.  

Much like the government’s NBS data that was released last week, the manufacturing sector disappointed, while the services sector continued to expand but at notably slower rates.

In the manufacturing sector, both job creation and optimism suffered in June 2023.

Commenting on the latest data, Dr Wang Zhe, Senior Economist at Caixin Insight Group said,

A slew of recent economic data suggests that China’s recovery has yet to find a stable footing, as prominent issues including a lack of internal growth drivers, weak demand and dimming prospects remain.

New orders were in expansionary territory but fell to a five-month low, while aggregate employment did see an uptick driven by service sector growth.

Interestingly, the average input costs trended lower marking the first such instance in over three years, while output charges shifted lower for a third consecutive month, implying the possible emergence of deflationary pressures.

Caixin China General Services PMI

The services sector has been the beacon of optimism in the post-covid Chinese economic recovery and expanded for a sixth consecutive month.

However, the measure marked the softest pace of growth in five months, falling to 53.9, down from 57.1 in May 2023, and underperforming expectations of 56.2 as reported by Investing.com.

This points to a loss of momentum in the Chinese economy post the reopening and lifting of severe health restrictions, and may come to threaten the recovery.  

As noted in an earlier piece regarding last week’s NBS PMI numbers,

…seems to have begun to give way to the reality of a weaker consumer…reflecting a less enthusiastic consumer moving ahead.

Business activity and new orders both expanded at significantly slower rates than in May, as some firms reported that market demand was underperforming internal forecasts.

Input cost inflation stayed below the ‘series trend’, while output charges remained sticky.

New orders continued to expand (i.e., stayed above 50) for the sixth month in a row, but moderated significantly, reaching their lowest levels since December 2022.

In the meantime, exports were robust but also edged down to their softest since January 2023.

As noted in last week’s NBS PMI data, external demand, tourism, and travel were important drivers for services growth post reopening, but are now seeming to run out of steam.

Interestingly, the 12-month business sentiment gauge did improve for the first time in five months as export conditions improved, companies anticipated an increase in new orders and markets watched for a roll-out of supportive measures by the government.

Employment continued to show gains, remaining above 50, and tracked the strongest rise in three months, owing to the industry’s positive sentiment.

Average input costs across services were considerably firmer staying above 50 for the 36^th month in a row as added employment pushed up labour costs, while output costs were expansionary for a 14^th consecutive month.

However, input costs grew at a stronger pace than downstream prices in the past year, potentially flagging relative weakness in demand.

As per the report,

…(companies) indicated that efforts to remain competitive had limited their overall pricing power (despite high operating expenses).

 Commenting on the composite data, Zhe wrote,

In the future, stronger policy support is needed on the macro level, along with higher implementation efficiency from a micro perspective, to ensure that policies benefit market players directly and therefore bolster employment and market expectations.

Upcoming data

Economists and industry watchers will be paying attention to the Chinese government’s second-quarter GDP release that is due later this month.

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