(Bloomberg) -- China’s economy continued its slow recovery from the coronavirus slump in May, with better sentiment among companies tempered by the grim global outlook.
That’s the assessment from the earliest available indicators, which continued the pickup seen in April. However, global demand is weak and financial markets fell last week partly on disappointment at the government’s modest stimulus plans.
China’s Industrial Economy Improves While Consumers Remain Wary
Smaller firms were more confident in May than they have been since the outbreak of the coronavirus, with production and new orders up, according to a Standard Chartered (OTC:SCBFF) Plc survey of companies. Industrial output expanded in April, while consumption and imports continued to shrink. How those factors play out will be key, as the world’s largest trading nation continues to rely heavily on exports for growth.
“Production continued to lead the recovery, and domestic demand gained momentum,” according to Standard Chartered Economists Shen Lan and Ding Shuang. “As capacity utilization continues to rise, we think the strength of the recovery in domestic demand will determine if production acceleration can be sustained,” but overseas demand is still sluggish, weighing on any desire to expand, they wrote in a report.
South Korean exports in the first 20 days of May shrank more than 20% for a second month in a row, with shipments to China down 1.7% compared to the same period a year ago. South Korea releases trade figures earlier than most countries, so its data serves as a bellwether of world commerce.
While Chinese exports unexpectedly rose in April, that was likely due to manufacturers catching up on orders from before the pandemic, according to Bloomberg Economics’ David Qu.
“China’s trade is likely to remain soft, though some marginal improvement may emerge in the months ahead,” he wrote earlier this month. “Even so, a quick rebound to pre-pandemic levels is unlikely.”
New export orders to smaller firms are still contracting, albeit at a slower pace, according to the Standard Chartered survey. The index improved to 47.4 from 41 in April, with a number under 50 indicating a contraction.
Sales managers were more confident than in April, although the overall index was still in contraction territory.
Market Disappointment
Stock and commodity markets have weakened over the last month, as both were underwhelmed with the economic targets and stimulus measures announced last Friday, as well as the ratcheting up of geopolitical tensions between the U.S. and China.
While the coming splurge on infrastructure offers a material boost to demand for copper and steel, it may not be enough to offset weaker conditions in other key sectors like manufacturing, property and exports.
Note on Early Indicator construction
Bloomberg Economics generates the overall activity reading by aggregating the three-month weighted average of the monthly changes of eight indicators, which are based on business surveys or market prices.
- Major onshore stocks - CSI 300 index of A-share stocks listed in Shanghai or Shenzhen
- Key property stocks - All the constituents of CSI 300 Index that are in the real estate industry
- Iron ore prices - Spot price of iron ore for shipment to Qingdao port (dollar/metric tonne)
- Copper prices - Spot price for refined copper in Shanghai market (yuan/metric tonne)
- South Korean exports - South Korean exports in the first 20 days of each month
- Factory inflation tracker - Bloomberg Economics created tracker for Chinese producer prices
- Small and medium-sized business confidence - Survey of companies conducted by Standard Chartered Bank
- Sales manager sentiment - Survey of sales managers in Chinese companies by World Economics Ltd.
©2020 Bloomberg L.P.