China’s resilient economy shakes off Hong Kong crisis

China’s resilient economy shakes off Hong Kong crisis

China’s latest survey data, released earlier this week, showed a pick-up in economic activity in June, boosting Asian equity markets the same day that Beijing passed sweeping new security laws on Hong Kong. While China’s political manoeuvre was roundly decried by Western governments, its recent economic recovery has caught many commentators by surprise.

China’s official manufacturing Purchasing Manager’s Index, a reliable indicator for economic activity, rose from 50.6 in May to 50.9 in June, the National Bureau of Statistics showed on Tuesday. The 50-point mark separates expansion from contraction, on a monthly basis.

While exports continued to benefit from the sale of Covid-related products (namely PPE and other medical equipment), the "new orders" component fared even better, suggesting that domestic demand has been the key driver behind China’s recovery.

In recent months, the government has ramped up infrastructure-related borrowing. Since the start of June, the central government issued approximately RMB 550bn (£65bn) in new bonds, the highest in a single month since 2007. 5G masts, physical data centres and intracity rail lines are understood to be top spending priorities.

Regardless of the real return on these investments, Beijing’s spending spree should galvanise near-term economic growth. In addition to boosting demand for industrial goods, infrastructure spending is also designed to provide support to tens of millions of low-paid workers.

It should be recalled that China’s labour market proved surprisingly resilient during the coronavirus crisis. State-owned enterprises and large private companies, under guidance from the Chinese Communist Party, refrained from mass layoffs during the lockdown. The surveyed urban unemployment rate rose by just 1% at the height of China’s virus peak.

Admittedly, migrant workers are typically overlooked in official employment statistics. Since May, however, there has been rapid job creation in the construction sector – a key source of infrastructure investment and a large employer of migrant workers.

Julian Evans-Pritchard, senior China economist at Capital Economics, recently noted that “the true unemployment rate is now likely in the range of 7% to 8%, up only modestly from around 5% prior to Covid-19”.

Meanwhile, a pick-up in high-frequency proxies for consumer activity – subway traffic, road congestion and property sales – suggests that China’s state-led investment binge is towing other parts of the economy with it. The upshot is that GDP growth probably turned positive in Q2 in year-on-year terms, following a sharp contraction in the first three months of the year.

Looking ahead, export growth from Covid-related demand will likely slow as other countries restart their own manufacturing industries. In addition, growing political tensions with the US, Australia and Hong Kong could trigger further international sanctions against China. That said, the rebound in domestic activity should keep China’s recovery firmly on track over the coming quarter.