Further contraction finally forces Beijing’s hand

China’s economy again contracted in May, with manufacturing and services reports also showing activity remained in a contractionary phase, though the slump was not as deep or as nasty as what we saw in April when they fell to two-year lows.

The official manufacturing activity index from the National Bureau of Statistics (NBS) rose to 49.6 in May, from 47.4 in April.

And the NBS non-manufacturing survey – which measures business sentiment in the services and construction sectors – rose to 47.8 from the low 41.9 in April.

The official composite PMI, which includes both manufacturing and services activity, rose from 42.7 in April to 48.4 in May.

Although bouncing from their more than two-year lows in April, the surveys clearly show that activity remains in a contractionary phase, although economists expect the staged re-opening of Shanghai, which expanded from today, will see both reading back in expansion in June.

Activity in Beijing is also improving as the clampdowns are eased, but the capital’s timetable remains well behind Shanghai.

Reuters reported on Tuesday that Tesla’s big factory in Shanghai is moving back its lockdown capacity to 70%, which markets in Asia took as positive news yesterday.

The reports said Tesla added a second shift of workers in the middle of last week and is expected to increase output further this week.

The latest figure for manufacturing marked the third straight month of contraction in factory activity, with output (49.7 vs 44.4 in April), new orders (48.2 vs 42.6), and new export orders (46.2 vs 41.6) all falling at slower rates. Better (but still negative) figures were reported for price pressures – input costs rose the least in four months (55.8 vs 64.2) while output charges fell for first time since January (49.5 vs 54.4).

Non-manufacturing activity was hit again by the impact (lessened compared with April) of the Covid lockdowns in Shanghai and Beijing, with activity improving elsewhere.

“The official PMIs add to broader evidence that activity has started to rebound as containment measures were rolled back. That said, the recovery is likely to remain tepid amid weak external demand and labour market strains,” said Sheana Yue, China economist at Capital Economics.

“The PMIs probably understate the scale of recovery this month given that the surveys mostly took place prior to when most restrictions in Shanghai were relaxed. High-frequency data suggest that service sector activity has improved since then. We suspect that the hard data due over the coming weeks will reveal a stronger recovery,” she added.


Hours after these weak surveys of activity across the economy were announced, China revealed a swag of policy changes designed to stimulate the economy and try revive demand and production.

China’s State Council or cabinet released a package of 33 measures covering fiscal, financial, investment and industrial policies on Tuesday to get the pandemic-shattered economy stabilised and then growing as quickly as possible.

The stimulus ideas were hinted at a week ago by the State Council but this time they are firmer and carry more detail.

China will look to expand private investment, accelerate infrastructure construction and stimulate purchases of cars and home appliances to stabilise investments, according to the measures.

In terms of monetary and financial policies, China will boost financing efficiency via capital markets, by supporting domestic firms to list in Hong Kong (now seemingly, the official offshore market), and promote offshore listings by qualified platform companies.

The State Council also vowed to further reduce real borrowing costs, and strengthen financial support for infrastructure and major projects.

To enhance fiscal support to the economy, China will accelerate local government special bond issuance and cash support for firms that hire college graduates.

The chief aim is to try and steady and then drive investment and consumption higher – to do so, the government told local governments across the country not to expand curbs on auto purchases and said those which already have curbs in place should gradually increase their quotas on car ownership.

Shanghai immediately did that with a proposal to expand the number of licences given to own new cars this year, as well as a host of other changes to tax, fees and charges, investment and ownership of assets.

The Ministry of Finance also said on Tuesday that it would halve the purchase tax for small-engined cars – a move that will see a sharp rise in car production sales in the next month to so, especially New Energy Vehicles (plug EVs and hybrids).

After two years of abusing and cracking down on big tech companies, especially the likes of Tencent and Alibaba, as well as ride share and education businesses, China now wants them to play a major role in stabilising jobs.

So-called platform companies (like Tencent or Alibaba) will be encouraged to make breakthroughs in areas including cloud computing, artificial intelligence and blockchain technologies.

There will be tax credit rebates to more sectors and plans to allow firms in industries hit hard by COVID-19 curbs to defer social security payments, the State Council said.

Other measures include policies to ensure energy and food security, and stabilise supply chains.