Softer economic data call for quick, decisive action

May data show the Chinese economy is softening year-on-year, from industrial output growth to fixed-asset investment expansion.

The manufacturing purchasing managers' index for May also weakened, standing at 48.8, falling short of the market expectation of 50.8. A reading above 50 indicates expansion, while a reading below 50 reflects contraction.

The manufacturing PMI fell for three straight months, with the readings in April and March also below 50 — such a plunge deserves keen attention. Other economic readings were in step with the continued dip in PMI last month.

In addition, the average daily freight traffic volume fell by 1.6 percent in May compared with the previous month, said the Ministry of Transport. Statistics from G7 Connect, an internet of things software service provider, show that the figure decreased by 3.3 percent month-on-month.

As a sign of slower growth in both supply and demand, the subindex for business production and new orders, which edged down to 49.6 and 48.3, respectively, in May, fell into contraction territory.

Manufacturers have already fulfilled a backlog of orders that had been disrupted by the pandemic in the past few months. The pullback in demand and production reflects weakening overall economic fundamentals.

The employment and labor cost situations in May also corroborated that the production side had been under pressure. The business conditions index developed by the Cheung Kong Graduate School of Business — which surveys small and medium-sized firms in the private sector — showed that the labor cost and recruitment index dropped by 3.3 and 1.5 points in May, respectively, compared with the previous month.

The unemployment rate for the 16-24 age group hit a record high of 20.4 percent in April, which was higher than that seen during the pandemic. As the graduation season approaches, employment pressure on this young demographic will rise.

Export orders continued a downward slide due to sluggish overseas demand in May. The subindex for new export orders stood at 47.2, down by 0.4 point from the previous month. Exports, in dollar terms, grew 8.5 percent year-on-year in April, which was better than market expectations.

Given China's export order trend and the PMI for the manufacturing sector of major economies worldwide, the outlook for exports remains grim.

The PMI for the manufacturing sector of major economies slipped into contraction in April. In particular, the manufacturing PMI of the eurozone and the UK continued to dip in May, down 1.2 and 0.9 points, respectively, from the previous month, which bodes ill for sustaining global growth momentum.

The PMI for China's nonmanufacturing sector stood at 54.5 during the same period, data from the NBS showed. The figure is lower than previous month's 56.4, which remained in expansionary territory but pointed to a downward trend.

Compared to the notable fall of the PMI for manufacturing, that for the nonmanufacturing sector still has strong resilience. From the subindex, the PMI for the construction industry plunged 5.7 points from the previous month to 58.2 in May, and the PMI for the services sector dipped 1.3 points from the previous month to 53.8.

It's worth noting that the prosperity index of the construction industry has continued to fall since February. From the beginning of the year, the real estate market remained gloomy, with a deeper decline in investment and sales in April.

Prices of such commodities as steel and glass also continued to tail off, which showed that the real estate and construction industries are under pressure. Weak domestic demand is extending to the upstream and mid-stream portions of the industrial chains.

In May, the PMI for large-scale enterprises stood at 50, a 0.7 point higher than the previous month, while the PMI for small and medium-sized enterprises came in at 47.6 percent and 47.9 percent, 1.6 and 1.1 points lower than a month earlier, respectively.

Over the past month, both high-frequency data and monthly data indicate that the momentum of the post-pandemic recovery is slowing, as evidenced by the decline of industrial output growth, sharp fall in corporate profits, less real estate investment and greater downward pressure on prices.

The rapid slump of the PMI for three consecutive months, as well as an overall downturn in subsector readings, is sending an explicit message that the momentum of economic growth is waning in the short term. Such a phenomenon should merit high attention.

The economic downturn will weaken people's confidence in terms of income and employment stability, which will subsequently inhibit consumption. Lack of consumption will lead to lower prices, further dampening business confidence and expectations.

The authorities should remain vigilant to prevent economic sluggishness, a deflationary mindset and pessimistic expectations from reinforcing one another and take decisive measures to reverse the economic decline, bolster social expectations and dispel deflationary fears.

In addition, the pandemic has dealt a tough blow to household and corporate balance sheets, which will take some time to restore. Balance sheet repair is no way an easy feat as the process is always accompanied by contracted demand.

While the private sector is still undergoing recuperation, government departments should do whatever possible to make up for shortfalls in aggregate demand.

If the public sector does not step up to fill the gap with even radical measures to deleverage, aggregate demand will continue to fall. At such a time, deleveraging will enter a nasty and unsustainable phase, and deflationary risks may rise sharply.

Therefore, the public sector should adopt substantial easing measures regarding both the supply and demand sides of overall money supply and in terms of quantity and price, to stabilize and expand aggregate demand.

Such efforts will provide the time needed for the recuperation of the private sector and advance deleveraging and balance sheet repair campaigns in a sustainable and orderly manner.

Difficulties facing the Chinese economy are only temporary, phased and cyclical, and can be overcome. The Chinese economy has great resilience, potential and flexibility. Its strong fundamentals that are conducive to long-term development will remain unchanged.

More importantly, the central government fully and objectively recognizes the current difficulties, and rolled out a slew of policy steps to improve consumer confidence and expectations at the beginning of the year. It remains steadfast in making economic development the primary and central task.

All parties concerned should implement to good effect the decisions made at the Central Economic Work Conference in December and the policy steps laid out in the meeting held by the Political Bureau of the Communist Party of China Central Committee at the end of April.

Decisive measures, forward-looking and bold actions should be taken to stem the economic downturn, reverse deflationary expectations and shore up overall consumer and business confidence.

The writer is chief economist at financial institution China Renaissance. The article is a translation of a piece in Chinese by the China Chief Economist Forum think tank, published on its official WeChat account.