Is China's economy set to roar?

Earlier this week, China’s official PMI’s were hotter than expected. Today, the Caixin Services PMI followed suit. China’s two sessions meeting this weekend will set the stage for the Chinese economy this year with implications for global stocks and commodities.

The Hang Seng / Hong Kong 50 index features many of China’s largest companies, including Tencent, Alibaba & Meituan. The index has already recovered from a deep selloff and flipped the 200 day moving average.

Now, we’re looking at China’s economy picking up speed after reopening. The latest Caixin PMI paints an optimistic picture.

Dr. Wang Zhe, Senior Economist at Caixin Insight Group highlighted some key points:

“Services sector employment also showed signs of improvement, with the strengthening of supply and demand conditions leading businesses to begin hiring more workers. The related gauge rose above 50, marking an end to a three-month contraction and hitting the highest since November 2020.

“There was still a lot of optimism in the services sector in February as business owners continued to express great confidence in an economic recovery upon the easing of Covid controls. The reading for expectations for future activity slipped from the previous month, but remained at a high level.”

Businesses are hiring and expecting the future to be brighter, typical of early cycle activity. So, what will the recovery look like?

More importantly, how ‘independent’ can that recovery be? The majority of the global economy is currently trying to squash demand to cure inflation, so China can’t rely too heavily on strong export demand as a driver for the domestic economy.

Policy aimed at stimulating domestic consumption and incomes could have an outsized impact on Chinese stock markets. Theoretically, more domestic consumption could boost corporate profits, especially at consumer giants such as Alibaba.

From a commodity perspective, infrastructure investment plans will be closely watched. If China is to boost GDP growth to as much as 6% (as some sources have suggested), infrastructure spending has been their favourite lever over the years.

Usually, higher construction activity would lead to higher demand (and prices) for commodities, including oil and copper.

However, ING analyst Iris Pang has doubts. On one hand:

"We have identified infrastructure investment as the second major growth engine for 2023 while consumption is the main source of growth for the economy. The question is, when will infrastructure investment turn into actual construction activity?"

She also highlights that the lack of ‘front-loaded’ special bond issuance so far in 2023 is a potential sign that infrastructure spending is less imminent than hoped.

"This will affect the growth of infrastructure investment as more than half of the special bonds go into infrastructure projects."

"This could be related to the change in top government personnel as infrastructure planning can involve different government departments. Another reason could be that the fiscal deficit has been big at around 8%-9% of GDP in 2022, partly due to high expenses for Covid."

"Our concern is that the government may need to slow down fiscal spending and be very selective in its infrastructure investments. In this case, infrastructure may not be a growth factor, and China's overall economic growth could be slower than we expect."

If China’s growth is indeed slower, this could be extremely concerning for the health of the global economy, especially in the context of weakening demand and tighter monetary policy.