SUMMARY:
- China’s PMI readings for March reaffirm that the service sector is leading the economic rebound while momentum in manufacturing is more subdued; a more broad-based recovery will take some time, given that Beijing is unlikely to unveil new stimulus measures in the near term.
- Increased mobility in China is a key factor for global oil demand, but industrial activity is also important; soft readings in the latest manufacturing PMIs, especially new export orders, should be seen as part of the context behind the surprise OPEC+ production cut.
- China’s announcement of a cybersecurity investigation into Micron Technology serves as an important watchpoint, but it is unlikely to signal broad-based regulatory harassment of US firms.
PMI readings reaffirm a services-led recovery
The Caixin service sector PMI for March, released on Thursday, came in above expectations at 57.8, up from 55 in February – the highest reading since November 2020. This contrasts with the Caixin manufacturing sector PMI released earlier this week, which slowed to 50 in March from 51.6 in February. The comparable PMI indexes released last week by China’s National Statistics Bureau tell a similar story: service activity is strong, fueled by reopening, while the momentum in industry is more subdued.
This pattern is consistent with our long-held view on China’s outlook for 2023, which calls for a services-driven recovery that has smaller positive spillovers for global growth, especially hard commodities, compared to a cycle driven by accelerating industrial activity and fixed investment. That view was reaffirmed by last month’s National People’s Congress, which signaled a conservative growth target and relatively disciplined stimulus (see our NPC write-up HERE).
The restrained growth in manufacturing activity points to a recovery in which private sector demand has yet to come roaring back (please see: China’s recovery still has a “missing middle”, 15 March 2023). Households, firms, and local governments in China are all in a mode of balance sheet repair due to the combined effects of the Covid economy and real estate downturn in 2020-2022. Exports, which had been a key support for demand during the pandemic, are now slowing (new export orders were contractionary in both the Caixin and official manufacturing PMIs).
Beijing will keep policy accommodative but – given a focus on avoiding longer-term financial risks – not unveil major new stimulus measures in the near term. Indeed, Chinese media have reported that the PBOC provided window guidance to banks in March to slow credit growth after a large increase in lending to firms in January and February. If broader activity fails to gain steam in coming months, policymakers could provide additional credit and fiscal stimulus in Q3.
A broad-based pick up in demand will require a rebound in household income growth and confidence, which in turn depends on steady gains in employment. The strong momentum in services, which are more labor-intensive than manufacturing, will help with that but the recovery will likely continue to be gradual.
When it comes to global oil demand, increased mobility in China is key but industrial activity is also important. On Wednesday, 22V’s commodities research head Colin Fenton and I held a Webinar to discuss the global commodities outlook and its interplay with China’s economic recovery (replay HERE). Among Colin’s points is that while increased mobility in China (albeit from a low base in 4Q2022) is a key driver for global oil demand, it can only go so far in making up for signs of weakening demand in the US – that includes end demand for petrochemical-based end products fabricated in China and elsewhere in the world. The weak readings for new export orders in the China manufacturing PMIs were thus likely part of the context behind the surprise OPEC+ production cut.
Micron investigation is a watchpoint but likely also an outlier
The announcement last week that the Cyberspace Administration of China (CAC) will conduct a cybersecurity investigation into Micron Technology is weighing on the company’s shares but also prompting broader concerns over the potential for Beijing to target US firms using regulatory and other informal tools. Beijing has generally been restrained when it comes to responding to US actions such as the campaign against Huawei and, more recently, the sweeping semiconductor controls imposed in October. Is the dam of restraint now breaking?
When Chinese agencies use political or regulatory tools to target foreign firms, they are guided by several considerations. These can overlap but also be in mutual tension:
- Domestic politics: demonstrate toughness to the domestic audience, particularly in response to perceived slights against China’s sovereignty.
- Foreign deterrence: Warn foreign firms and governments against future actions that displease Beijing.
- Industrial policy: Advance Beijing’s strategic interests by helping a domestic firm in competition with a foreign competitor.
- Avoid blowback: Refrain from taking actions that hurt China’s economy, such as harassment of that could spook firms producing in China. This is a key reason why Beijing has been cautious about lashing out at US firms, particularly those with large investments in China, given the chilling effect it could also produce for European and other multinationals.
Micron is an important watchpoint but also a special case. It is a watchpoint because there is indeed a risk that Beijing could increase pressure on US firms, not only for political reasons but also to advance the technological self-reliance drive that has risen to the very top of Xi Jinping’s agenda. It is a special case because Micron is an unusually attractive target for Beijing:
- Politics: The firm is regarded as something of a bad actor in China, stemming in part from a bitter dispute over IP theft with a domestic rival Fujian Jinhua. (Chinese media also accuse the firm of lobbying the US government for other actions taken against domestic semiconductor firms.)
- Industrial policy: The investigation and any rectification actions that stem from it will likely lead Chinese customers of Micron (including large handset makers) to further reduce their reliance on the firm. Indeed, the fact that the investigation is explicitly focused on the security of Chinese supply chains makes that intent fairly clear. Chinese memory chipmakers Yangtze Memory (YMTC) and ChangXin Memory (CXMT) are competitive with Micron and will presumably benefit; this is contrast to, for example, Nvidia, which has no real Chinese rival or plausible substitute. Micron’s latest 10-Q filing states these risks plainly and notes “the Chinese government may restrict us from participating in the China market or may prevent us from competing effectively with Chinese companies.”
- Limited blowback: Micron has in recent years downscaled its presence in China, which makes it a more inviting target than US firms with large commitments in China. Of course, Beijing needs to be careful that Chinese customers of Micron don’t experience supply disruptions, which could limit the actual punishment meted out.
- Deterrence: The Micron investigation won’t deter US policymakers from further actions against Chinese chipmakers, and indeed may provoke further ire in Washington. But there could be some deterrence intended for third country governments and companies; the announcement came as Chinese officials had harsh words for Japanese counterparts after Tokyo announced measures to align its own export controls with the US measures from October.
Micron is thus worth monitoring – particularly for what it says about Beijing’s moves to boost self-reliance – but is unlikely to be the standard treatment for US firms in China. In considering actions against US and other foreign firms, Chinese officials will continue to be guided by the multiple objectives laid out above. The desire to limit economic blowback, particularly in a climate where Beijing seeks to reassure foreign business and keep supply chains in China, will act as a check on the severity of actions taken against US firms even if the pressure from geopolitics and the self-reliance drive is building. In a forthcoming note, we will discuss broader steps that China is taking to reduce dependence on the US, and increase global dependence on China, in strategic sectors.
