China’s Strong Recovery Shows Signs of Softening as Costs Surge

Vehicles and cyclists travel through an intersection on Financial Street in Beijing, China. (Photographer: Yan Cong/Bloomberg)

China’s Strong Recovery Shows Signs of Softening as Costs Surge

China’s strong economic momentum eased slightly in May, as surging raw material prices squeezed profits, businesses turned more cautious and property and car sales underperformed.

That’s the outlook of an aggregate index combining eight early indicators tracked by Bloomberg, which slipped from April but remained in expansionary territory, underpinned by solid export demand.

China’s Strong Recovery Shows Signs of Softening as Costs Surge

Confidence among small and medium-sized enterprises, or SMEs, eased in May from the highest level since the Covid-19 outbreak in the previous month, according to a survey of more than 500 companies by Standard Chartered Plc. The index measuring current performance weakened in the month, while a drop in the ‘expectations’ sub-index points to concerns on future demand and profit margins.

“Surging raw-material prices appears to have become the key challenge for SMEs,” according to Standard Chartered’s economists Lan Shen and Ding Shuang. “Domestically-focused SMEs seem more vulnerable to rising input costs, while export-oriented SMEs’ profit margins remained intact on strong new orders and elevated output prices.”

The strength of overseas demand can be seen in South Korea’s exports in the first 20 days of the month, which surged at the fastest pace in a decade.

China’s Strong Recovery Shows Signs of Softening as Costs Surge

A global commodities rally helped boost factory-gate inflation in China to the highest level on record in May, according to Bloomberg Economics’ price tracker. Copper and iron ore prices surged to records this month, though the rally stalled in the past two weeks as China stepped-up efforts to contain costs amid inflation fears.

China’s Strong Recovery Shows Signs of Softening as Costs Surge

China’s stock market climbed in May, with the benchmark index of 300 mainland companies this week reaching its highest level since March.

Home sales fell in the month, a sign that regulators’ efforts to control housing risks may be having an effect after monetary easing last year stoked a rebound in the residential market. The gauge for car sales decreased markedly in the period.

Early Indicators

Bloomberg Economics generates the overall activity reading by aggregating a three-month weighted average of the monthly changes of eight indicators, which are based on business surveys or market prices.

  • Major onshore stocks: CSI 300 index of A-share stocks listed in Shanghai or Shenzhen (through market close on 25th of the month)
  • Total floor area of home sales in China’s four Tier-1 cities (Beijing, Shanghai, Guangzhou and Shenzhen)
  • Inventory of steel rebar, used for reinforcing in construction (in 10,000 metric tons). Falling inventory is a sign of rising demand
  • Copper prices: Spot price for refined copper in Shanghai market (yuan/metric ton)
  • South Korean exports: South Korean exports in the first 20 days of each month (year-on-year change)
  • Factory inflation tracker: Bloomberg Economics created tracker for Chinese producer prices (year-on-year change)
  • Small and medium-sized business confidence: Survey of companies conducted by Standard Chartered Plc
  • Passenger car sales: Monthly result calculated from the weekly average sales data released by the China Passenger Car Association

©2021 Bloomberg L.P.

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