The winds of change in China
After two months of shutdowns, China’s factories are beginning to awaken from their hibernation with news of manufacturers such as Foxconn, a major Apple supplier, re-opening their production lines. But, are these just selective news stories given China’s economic engine is still facing a cold start, or, are things improving rapidly with economic activity normalising in a more systemic and widespread way?
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To get a better understanding, we looked at Nitrogen dioxide (NO2) emission levels in China, as at 8 April, and found that industrial activity was rapidly recovering in the latter half of March, and in the second quarter levels seems to have normalized to pre-Covid levels.
As a background, NO2 or nitrogen dioxide is a reddish-brown and pungent gas that is emitted from the burning of fossil fuels. A common indicator of pollution levels, NO2 levels indicate the intensity of industrial production and heavy manufacturing within a given area.
Analysis of average daily NO2 levels across six major manufacturing hubs – Shanghai, Beijing, Tianjin, Qingdao, Guangzhou and Shenzhen - over the past three months, shows that the average monthly levels of NO2 emissions increased to a reading of 16.6 in March, 19% higher than February’s average of 14. So far in April, industrial activity has picked up significantly with the average daily reading reaching levels of 23 and above over the past few days. This surpasses the five-year historical daily average of 22.8 and reaches the same level seen in January prior to the Lunar New Year and lockdowns.
This surge in activity is supported by the official Purchasing Manager’s Index (PMI) which surged to 52 in March, up from February’s record low of 35.7, far above market expectations of 45. The PMI summarises market conditions to provide current and upcoming business conditions for company management, analysts and investors; a PMI above 50 relates to economic expansion, while below, signals a contraction.
Going forward, we believe economic conditions are quickly normalising in China as more cities reopen their borders and both human and economic activity resumes. However, consumer demand will remain weak in the coming months with most of China’s major export markets still under lockdown and this will curtail future growth for some time.