The PMI index published some time ago by the National Bureau of Statistics of China indicates a downward trend. PMI figures show that in March, the manufacturing purchasing managers, non-manufacturing business activity and composite PMI production indices were at 49.5%, 48.4% and 48.8%, down from 0.7, 3.2 and 2.4 percentage points respectively compared to the previous month. All three indices have fallen below the critical point, suggesting that China’s overall economic prosperity level has begun to decline steadily. This, in fact, indicates that the country’s economic growth is still under tremendous pressure and the outlook for it in the first quarter is not exactly a bed of roses.
ANBOUND’s analysis of China’s economic data between January and February shows that the rebound in its domestic economy in the first two months would not be sustainable. The country’s overall economic growth therefore remains “low at the start, high at the end”. This basically means that the trend is gradually heading towards a “soft landing”. Although industrial production, consumption and investment in January-February all performed quite well, on the one hand it is the response of the global economy as part of the introduction of the intercyclical adjustment policies since the end of last year. In reality, the recovery of the country’s domestic economic engine remains insufficient. Beyond the scope of the data, the actual situation for SMEs and final consumption is not as optimistic as expected, and could even be worse. With monetary policy stalled and financial support still lagging since the start of the year, it is difficult for the macroeconomy to reverse the bottoming process.
The PMI for large companies in March was 51.3%, 0.5 percentage points lower than the previous month and 1.8 percentage points higher than the overall industry manufacturing. The PMI for midsize companies was 48.5%, 2.9 percentage points lower than the previous month and had actually fallen into the contraction range. The PMI for small businesses was 46.6%, which is consistently below the tipping point. This essentially corresponds to the continued pressure that terminals and small and medium enterprises are facing under the impact of the ongoing COVID-19 pandemic. In addition, some companies interviewed reported that due to the current epidemics, several problems arise. These include insufficient staff on duty, poor logistics and transportation, extended delivery times and other supply chain issues. All of these are the main factors behind the slowdown in the economy. The situation in the services sector is also somewhat similar. Sectors involving a greater number of people in close contact, such as rail transport, air transport, accommodation and catering have all been strongly affected by the pandemic. As a result, their business activities have declined significantly. The business activity index fell by more than 20.0 percentage points and businesses in general are facing increasing pressures. However, the activity index of certain industries such as telecommunications, radio, television, satellite transmission services, monetary and financial services is doing well, rising to more than 60.0%.
The drastic changes in situations across the globe in March also had a significant impact on China’s domestic economy: energy and raw materials. This not only increased supply chain tensions such as raw material supply, but also caused volatility in the Chinese capital market; second, the pressure from China’s COVID-19 prevention and control measures has increased, with some major economic regions in the country such as Shenzhen and Shanghai implementing “static management”. This not only has a huge impact on the local economy, but has also affected related regions and sectors accordingly, which puts pressure on the economy of the country as a whole.
Based on its objective judgment on the economic situation, ANBOUND has repeatedly stressed the need for sustainability and continuity of macroeconomic policies. We believe that amid the “low start, high end” growth trend, monetary policy should remain loose to maintain continued support for economic demand. The recent executive meeting of the State Council on the economic situation indicates that such a point of view is the subject of consensus at the level of political decision-making. The meeting mentioned that the current international situation is becoming more and more complex and serious, and because of this, 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, to coordinate it systematically, to adjust the structure and to push forward the reforms. The meeting also deliberated that policies aimed at stabilizing the economy should be released as soon as possible, while measures that are not conducive to stabilizing market expectations should not be introduced. It should also be noted that the formulation of specific plans to deal with the greatest uncertainty should be undertaken as early as possible. Contrary to the previous understanding that the Chinese economy shows early improvements, the competent authority in the current decision-making process now proposes that “it is necessary to anticipate and prepare for a worse situation in advance”. As the economy faces daunting challenges, achieving stable growth requires continued and healthy policy support.
The People’s Bank of China (PBoC) monetary policy meeting in the first quarter of this year pointed out that the current national economy in China is facing the triple pressure of “falling demand, disrupted supply and weakened expectations”. It would therefore be necessary to strengthen the country’s cross-cyclical and counter-cyclical adjustment. In addition, the PBoC also suggests that it would be essential to increase the implementation of prudent monetary policy and give full play to the role of monetary policy tools. With the dual function of total volume and structure, China’s structural monetary policy tools should actively aim for precision efforts, while taking the initiative to respond to challenges. The evolution of the content of these monetary policy meetings is indeed in contradiction with the judgment of the executive of the Council of State on the economy.
ANBOUND researchers believe that under the downward pressure on the economy, the possibility and feasibility of a monetary policy adjustment in the second quarter increases. The PBoC can improve financial supply on both the supply and demand side through structural and comprehensive 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 will likely continue to encourage small and medium-sized enterprises. banks to engage in related activities to reduce the required reserve ratio. This is also done in order to achieve the policy objective of directing financial resources towards small, medium and micro-enterprises and towards the green economy sector. In terms of overall policy, in line with the requirement to promote the stability of increasing credit growth, moderate easing will continue to be implemented, along with overall RRR reductions and gradual reductions in interest rates. guiding interests.
The economic downturn is likely to worsen if monetary policy fails to “prepare for the bad day” in February and March this year to provide sufficient support. Although increased support in terms of macroeconomic policies will not necessarily lead to rapid stabilization and a rebound of the economy, the possibility of a “hard landing” must be avoided. Under these circumstances, it would be both necessary and urgent for monetary policy to step up its easing in the future. As the Federal Reserve accelerates the pace of interest rate hikes and accelerates policy tightening, space and time for China’s moderate easing policies are facing constraints.