China economy continues to recover steadily
China reported its official NBS manufacturing PMI at 51 in August, down 0.1pp from a month ago. The reading was weaker than market expectation at 51.2. The key drags were weaker production (fell 0.5pp to 53.5) and raw material inventory (fell 0.6pp to 47.3), possibly caused by flood disruptions in southwest China. But that said, external demand continued recovering, with new export orders PMI up 0.7pp to 49.1. Employment PMI also edged up (+0.1pp) for the second consecutive month to 49.4.
Meanwhile, the NBS non-manufacturing PMI saw a sharp 0.8pp increment to 55.2 in August. The improvement was driven by stronger services PMI which went up 1.2pp to 54.3, reflecting stronger activities in accommodation, travel, catering and leisure. The stronger service activity has out-weighted a slightly weaker construction PMI which was down 0.3pp to 60.2.
While the pace of recovery in the manufacturing sector seems to have plateaued, the step up in non-manufacturing PMI reflects that the service sector is picking up momentum. Together with better external demand condition, we expect overall economic activities would continue to outweigh the impact of summer flood disruptions on construction and production.
On policy, we expect the government and PBoC to maintain their supportive measures in place and not tightening them prematurely. On credit, we expect China’s society-wide financing growth to edge up a bit further to over 13% yoy in the coming months, driven by the rise in government bond issuances. The recovery in activities and continued government supports are expected to help GDP growth recover back to the potential 5-6% yoy range by 4Q20, in our view.
China’s export growth (US$ terms) surprised on the upside, accelerated to 9.5% yoy in August from 7.2% yoy in July. Imports fell 2.1% yoy, weaker than the 1.4% yoy contraction over the same period a month ago. The trade surplus has narrowed to US$59 billion in August from US$62.3 billion in July.
The surprising resilience in exports is due to some special factors, including a surge in exports of personal protective equipment and work/study-from-home products. The decline of exports by some emerging market competitors, which remain severely affected by the pandemic, also helps. The strong 23.5% yoy computer export growth in August could have been bolstered by back-to-school demand for online classes as the summer holiday came to an end. Better-than-expected export growth may suggest resilience in industrial activities and pose upside risk in industrial production growth in August.
Phase-1 trade deal related purchases remain steady but still well behind target. Import growth from the US moderated further to 1.8% yoy in August, versus 3.6% yoy in July. Assuming the share of goods in the Phase-1 trade deal purchase list remains at past five months' average (62%) of China's total imports from the US, we estimate China has only reached 33% of the annual purchase target year-to-date (versus 29% in January-July) with an incremental gain of 4.5pp in August.
We think China’s export growth may remain elevated in the coming months, after which a number of headwinds could materialize, including the fall in work/study-from-home demand. We think stronger China trade surplus could lend further strength to the RMB, though a worsening US-China bilateral relationship might create downside pressures.
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