What China’s Recovering Supply Chain Means for Global Inflation
After months of COVID-related disruptions, China’s economy looks to be on the path to normalization. In June, new daily coronavirus case counts stabilized in the low hundreds. More people are hopping on planes and trains, intercity highway traffic has rebounded to pre-outbreak levels, and city traffic is congested again.
Factory activity in June expanded for the first time since February, as manufacturing hubs emerged from lockdowns, production increased, and supply chains eased. The manufacturing purchasing managers’ index (PMI) crossed the 50 mark into expansionary territory, and industrial production rose 3.9% year-over-year (y/y). In particular, China's June exports rose at the fastest pace in five months, indicating resilience in the country’s manufacturing supply chain.
The Chinese government has prioritized production and delivery of exports. To be sure, the robustness of China’s supply to the global goods market has been tested repeatedly since 2020, through waves of COVID outbreaks, power outages, and regional geopolitical crises – all without major bottlenecking. As China’s domestic supply chain continues to normalize, supply-side pressures should ease. In addition, soft domestic demand has helped China keep its inflation under control and producer price inflation (PPI) has been moderating in recent months. This, together with the depreciation of the yuan in early 2Q 2022, has resulted in a moderation of China’s export price inflation to the U.S.