Markets encouraged by China reopening despite weak PMIs

(Alliance News) - Tuesday's economic data from China showed ongoing weakness in its manufacturing sector, but investors are still hopeful of the potential for a rebound in Asia's largest economy this year.

The latest Caixin China general manufacturing purchasing managers' index fell to 49.0 points in December from 49.4 in November. This shows the contraction in the sector marginally worsened, as it fell further beneath the 50-point no-change mark.

It marked a fifth-successive monthly deterioration in operating conditions. Caixin said this occurred as efforts to stop the spread of Covid-19 continued to disrupt operations and dampen client demand.

It was, however, less gloomy than the official PMI survey figures released over the weekend, which showed a reading of 47 points, compared to 48 in November, according to the National Bureau of Statistics.

"The Caixin survey, though smaller, has greater representations of light industries and private companies than the official survey...We think the sharp fall-off in December in the official index is a better indication of overall activity in the national economy, given the tsunami of Covid cases only started with the loosening of restrictions in November and December," noted Duncan Wrigley, chief china+ economist at Pantheon Macroeconomics.

"In any case, the overall short-term picture for China's economy is still dark as it struggles with mountains of Covid infections," he considered.

While output fell at a softer rate compared to November, according to the Caixin data, total new orders fell at a faster rate as companies reported weaker market conditions, prompting cutbacks in purchasing and headcount reductions.

However, Wrigley sees a "ray of light" in the Caixin future output index, which rose to a 10-month high of 59.3 in December from 56.1 in November.

"Firms are responding to China's incremental easing of Covid restrictions, notably with the 10 measures on December 7, scrapping testing requirements for domestic travellers and allowing home isolation for those with mild or no symptoms," he said.

"We share the positive outlook of the surveyed firms, in our expectation for a rebound in the Chinese economy from Q2 onwards, after the worst of the exit waves has passed."

Stephen Innes of SPI Asset Management noted that media reports and on-the-ground observers seem to indicate that China's peak in new daily Covid cases might have peaked.

"Despite the green shoots in mobility data, PMI indexes remain low. Still, policy messages have been consistently pro-growth, suggesting the mainland legislators will not sit idle but will be proactive, taking advantage of the reopening multiplier effect," Innes said.

The more positive macroeconomic backdrop means oil traders are "looking through" the weak PMI data - which would typically put selling pressure on oil - to a potential rebound in demand later in the year.

A barrel of Brent oil was trading at USD85.04 on Tuesday afternoon, up from USD83.21 at the London equities close on Friday.

By Elizabeth Winter, Alliance News senior markets reporter; and Greg Rosenvinge, Alliance News reporter

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