China’s economy looks good on paper. But there are red lines looming in the months ahead.
On Monday, a private business survey showed that factory sentiment in December continued to recover, edging closer to post-Covid-19 pandemic levels.
The data was released a week after profits at industrial companies increased for a seventh-month in November, according to the state-run National Bureau of Statistics. The numbers were fuelled by strong sales and robust production.
Still, there were warning signs in the Caixin/Markit Manufacturing Purchasing Managers’ Index.
“We need to pay attention to the mounting pressure on costs brought by the increase in raw material prices and its adverse impact on employment, which is particularly important for the design of the exit from stimulus policies implemented during the epidemic,” Wang Zhe, a senior economist at Caixin Insight Group, wrote in a summary accompanying the survey.
- Even though the Caixin/Markit PMI fell to 53 from November’s 54.9, it was still above the 50-level, which separates growth from contraction.
- The study includes the private sector, as well as small- and medium-sized companies.
- Last week, the official PMI fell to 51.9 from 52.1 in November.
- Industrial profits in November jumped 15.5% compared to a year earlier, or 729.32 billion yuan (US$111.50 billion), easing from October’s three-year high of 28.2%.
- It was another sign that the country has weathered the coronavirus storm while the rest of the world is caught in a revolving door of lockdowns.
- At this rate, China will overtake the United States to become the world’s biggest economy in 2028, a report released last month stated.
What was said: “The negative impact of the pandemic on the domestic economy further subsided and the manufacturing industry continued to recover. Both the supply and demand sides continued to improve. Overseas demand also steadily increased,” Wang, of the Caixin Insight Group, said.
Reaction to the news: “SMEs [small- and medium-enterprises] bore more of the brunt of rising costs, [with a] #PMI reading [down] 1.3 [points] to 48.8 – contraction zone,” China Beige Book, an independent research and data group, tweeted. Julian Evans-Pritchard, a senior China economist at Capital Economics, was more upbeat. “The latest manufacturing surveys suggest that factory activity remained strong in December but that the pace of expansion has started to ease,” he said.
China Factor comment: China has made a rapid recovery from the original Wuhan outbreak more than a year ago. While there are question marks hanging over the economic data pushed out by government-controlled bodies, the figures appear to illustrate a soft landing. Also, a new report released by the Center for Economics and Business Research has revealed that China will overtake the US to become the world’s biggest economy in 2028. Moreover, that is five years ahead of previous estimates because of Beijing’s response to the Covid-19 crisis. Still, scratch beneath the surface of the economy and you will find ballooning local government debt, high-risk in the banking sector and rising unemployment.