China’s PMI Forecasts Indicate Sluggish Post-COVID Recovery

Summary

  • Predictions indicate a small increase in the Purchasing Managers Index (PMI) from December’s 49.0 to 49.2 in January.
  • The National Bureau of Statistics will disclose the PMI data this Wednesday, providing the initial official depiction of the world’s second-largest economy’s start after a bumpy post-covid recovery.
  • China’s Central Bank Governor announced a surprise drop in the reserve requirement ratio for banks last week to stimulate growth amidst various economic challenges.
  • Only one out of the 35 polled economists foresee any expansion in factory activity this January.
  • According to Goldman Sachs, fluctuations in the NBS manufacturing PMI usually occur in January due to specific seasonal patterns.

PMI Forecasts and Economic Recovery

As per the average forecast from 35 economists in a recent survey, the official PMI may have seen a modest increase and reached 49.2 in January, from 49.0 in December. A score of 50 on this index distinguishes growth from contraction in the business sector.

The first official glimpse into the initial performance of the world’s second largest economy in this new year will be available to us this Wednesday, when the PMI data will be published by the National Bureau of Statistics. This comes at the heels of a post-pandemic recovery that was more uncertain than anticipated.

Policy Changes and Predictions

Pan Gongsheng, the central bank governor of China, last week unexpectedly declared a slash in the bank’s reserve requirement ratio in a press conference. This move aims to stimulate strong performance in the face of various adversities such as property market slump, local government debt risks, weak global demand, and persisting deflationary pressures.

Despite this, only one economist out of the 35 surveyed expects the factory activity to witness growth in January, predicting a PMI score of 50.5.

External Factors and Challenges

Goldman Sachs noted in its report issued last Friday that the NBS manufacturing PMI is likely to dip in January, citing historical data and seasonal trends. Particularly, this trend seems to hold in years when the Lunar New Year falls in late January or February. Consequently, they anticipate the index to soften to 48.8 this month from December’s 49.0.

Additional hiccups for Chinese exporters have occurred due to disruptions in Red Sea freight stemming from drone attacks on shipping by Houthi rebels. This creates supply chain challenges for factories right before the arrival of the Lunar New Year, which begins on 10th February this year.

This evolving economic scenario is projected to have an extensive impact on trading activities and various assets, particularly in forex markets where currency valuations can be closely tied to perceived economic performance.

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