Emerging Markets Debt Daily
China’s Economy – Vaccines Key for Rebalancing?Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyJune 30, 2021
China’s services PMI pulled back unexpectedly in May, raising concerns about rebalancing. The vaccination ratios provide a likely explanation. The downside surprise also means “no sharp policy turns” for now.
China’s post-pandemic rebalancing “curse” strikes again. The official manufacturing PMI1 was a touch stronger than expected in May (50.9), but the services PMI showed a significant (and surprising) pullback, sliding to 53.5. What’s going on? Can the chart below offer insight? For most of 2020, the U.S. was following China’s recovery “script” very closely with an approximately 2-month lag. But this changed in December 2020, and the gap between the U.S. and China services PMIs (as well as the composite PMIs – we’d be happy to provide the chart on request) started to widen. One possible explanation is that China began to withdraw policy stimulus much earlier than the U.S.
However, the widening gap also coincided with a big vaccination push in the U.S. China is catching up quickly, but the percentage of its population that is fully vaccinated (i.e., received 2 doses) is still about 1/3 of that in the U.S. Until China’s vaccination ratios significantly improve, authorities will have to rely on lockdowns to control the virus’s flareups, and the services sector will continue to experience hiccups. This is exactly what happened in June, when the COVID resurgence in Guangdong province led to tighter movement restrictions.
From a “big picture” perspective, there are multiple reasons why China’s growth momentum should continue to moderate in coming quarters – including the reopening of the rest of the world and tighter real estate and environmental regulations. The consensus currently expects real GDP growth to settle at around 5.5% in 2022. Further, the slump in China’s services PMI is not in the “end of the world” zone – the index is still well above the 50.0 expansion/contraction divide. But the softer momentum is hardly compatible with “sharp policy turns” – not as regards households, and especially not as regards small privately-owned companies.
Charts at a Glance: Big Gap Between China and U.S. Services PMIs
Source: Bloomberg LP
1We believe PMIs are a better indicator of the health of the Chinese economy than the gross domestic product (GDP) number, which is politicized and is a composite in any case. The manufacturing and non-manufacturing, or service, PMIs have been separated in order to understand the different sectors of the economy. These days, we believe the manufacturing PMI is the number to watch for cyclicality.
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
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