Domestic demand drives China’s post-pandemic recovery

Activity across China’s services sector grew sharply in August, in a sign of improved domestic demand as the country’s economic recovery continues to gather pace.

An official gauge tracking the country’s non-manufacturing sector beat expectations to hit 55.2 in August, compared with 54.2 in July, the country’s National Bureau of Statistics said on Monday. A reading above 50 indicates expansion compared with the previous month.

Improved performance in the services sector suggests that China’s broader economic recovery, which has been powered by state-supported industrial growth, is feeding through into businesses that were hit hard by the coronavirus outbreak and subsequent measures to contain its spread.

The country’s gross domestic product returned to growth in the second quarter as new cases of coronavirus slowed to a trickle, but concerns have lingered over continued weakness in retail spending, which fell in July for the seventh straight month.

Iris Pang, chief economist for greater China at ING, pointed to a boom in domestic tourism after the government eased restrictions, which she said could encourage more spending on services.

China’s Ministry of Culture and Tourism announced in mid-July that travel companies would be able to offer trips across provincial borders again, providing a boost to the tourism sector and unleashing pent-up demand at a time when international travel was still heavily restricted.

“There will be more jobs in the service sector because of this travel recovery, [and] with more jobs people will be more confident to spend,” she said. “I think this is sustainable.”

In a sign of precautionary saving by the country’s consumers, household deposits across China have soared this year, with People’s Bank of China data showing more than RMB90tn ($13.1tn) in June. The level eased slightly in July but still remains far higher than the end of last year when household deposits were below RMB82tn.

The official purchasing managers’ index (PMI) data showed the manufacturing sector also expanded in August, albeit at a slightly slower rate compared with last month. New export orders at factories remained in decline for the eighth consecutive month but the reading improved compared with July.

China’s export data has attracted close scrutiny as an indicator of a recovery in global trade and the level of demand overseas. Analysts at Nomura said the latest data suggested “headwinds from external demand remain intact”. 

“We caution that China’s export outlook may continue to face headwinds from recurrent waves of COVID-19 in overseas markets,” they noted.

Ms Pang said: “The internal cycle is running, now China is waiting for the external cycle to come back. Before that, China has to rely on its own internal cycle.”

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