By Clyde Russell
LAUNCESTON, Australia – The surprise contraction in China’s manufacturing index in April, coming after first quarter growth exceeded expectations, underlines the uneven nature of the recovery in the world’s second-biggest economy.
This variable economic story is likely to be mirrored in China’s imports of major commodities, with strength in some areas being offset by more modest demand in others.
The official manufacturing Purchasing Managers’ Index (PMI) dropped to 49.2 in April from 51.9 in March, slipping below the 50-level that demarcates expansion from contraction for the first time since December.
The PMI was also below market expectations for a positive outcome of 51.4.
Among the components of the PMI showing weakness were new export orders, with this sub-index declining to 47.6 in April from 50.4 in March.
Manufacturing is one of the key pillars of China’s economy from a commodity demand perspective, the others being construction and infrastructure.
The news here is somewhat mixed, with infrastructure investment rising 8.8 percent year-on-year in the first quarter, outpacing a 5.1 rise in overall fixed-asset investment, while property investment fell 5.8 percent.
The overall picture for the steel and copper intensive sectors is cloudy, with some areas of strength, but others still struggling to regain momentum after losing steam during China’s strict zero-COVID period, which ended in December.
If manufacturing, construction and infrastructure are uneven, what is the source of the strength in China’s economy, given that first quarter growth exceeded expectations?
Gross domestic product rose 4.5 percent in the first quarter, beating market forecasts for a 4.0 percent gain, but much of the outperformance was driven by retail spending, which isn’t especially supportive of steel and copper demand.
However, retail spending does help drive demand for energy commodities, such as transport fuels like gasoline and jet fuel, as well as coal for electricity demand as consumers buy more appliances and services.
This can be seen in the relatively strong performance for energy imports in recent months, with crude oil imports rising 6.7 percent in the first quarter from the same period a year earlier. – Reuters
