After becoming the only major economy to record positive growth in 2020, China’s recovery from the coronavirus pandemic appears to have plateaued this year, with lockdown measures to control virus outbreaks in the north expected to drag on first quarter output, according to new business surveys and analysts. However, the loss of economic steam could allay some market concern that Chinese policymakers were primed to roll back monetary stimulus measures too quickly. The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI), which focuses on small, private firms, dropped to 51.5 in January , below analysts’ expectations in a Reuters survey of 52.6. The 50-mark separates growth from contraction and January’s activity was the slowest pace in seven months. The data broadly mirrored China’s official manufacturing PMI, released on Sunday, which fell more than expected to 51.3 last month from 51.9 in December, the worst January reading since 2012. China’s economic recovery is peaking; the economic cycle has gradually turned to stagflation from recovery Ren Zeping The slowdown in manufacturing was accompanied by a fall in the official non-manufacturing index, which measures activity in the services and construction sectors. It tumbled to 52.4 last month from 55.7 in December – the biggest drop since China imposed nationwide lockdowns in February last year. Within the non-manufacturing PMI, the sub-index for the services sector fell to 51.1 from 54.8, with many restaurant and entertainment categories showing a contraction in activity. Taken together, the figures have exposed the fragility of China’s economic recovery from the pandemic. “China’s economic recovery is peaking; the economic cycle has gradually turned to stagflation from recovery,” Ren Zeping, chief economist at the Evergrande Research Institute, said in reference to Monday’s PMI data. His view was echoed by analysts from Beijing-based research consultancy Gavekal Dragonomics, who argued that “an unbalanced recovery” of the Chinese economy was nearing its peak. “The full recovery of consumption and services has been complicated by renewed public-health restrictions after local Covid outbreaks in north China. Many people will not travel home for the Lunar New Year holiday,” they wrote in a note published on Sunday. “The lesson is that China can’t fully normalise its economy as long as its population remains vulnerable to Covid infections, which means it ultimately depends on domestic and global progress on vaccinations.” Amid a winter resurgence of the coronavirus pandemic in some parts of China, Beijing has called for people not to travel during the important Lunar New Year holiday period , when traditionally hundreds millions of workers return to their hometowns and spend large amounts on travel, food and gifts. In the first three days of the Lunar New Year travel rush, which started on Thursday, passenger numbers on China’s railway system shrunk 70 per cent from the same period a year ago to 8.87 million, China State Railway Group said on Sunday. As a result of the most recent containment measures, Lu Ting, chief China economist at Asian investment bank Nomura, cut his forecast for first quarter economic growth to 18.0 per cent from his earlier forecast of 19.0 per cent. More telling, he revised down his first quarter estimate compared to the fourth quarter last year to only 0.3 per cent from 1.3 per cent. According to Lu, the drop in the Caixin PMI was more significant than the fall in official indicators, as it showed SMEs suffered more from the new virus outbreak and containment measures. Small and medium-sized enterprises contribute more than 60 per cent of the country’s gross domestic product and account for over 80 per cent of urban jobs, according to the government figures. A slowdown among these businesses is likely to cast a shadow over the job market, individual incomes and consumer spending, which is at the heart of Beijing’s “dual-circulation” strategy that is focusing on domestic consumption to drive future economic progress. The employment sub-indexes in both the official and private PMIs indicated firms cut jobs at a faster pace last month, showing the labour market is in a precarious position amid the new wave of infections. The recent run of bad news could convince Beijing now is not the time for a sharp shift in monetary policies, said Lu. Shen Xinfeng, chief macro analyst at Northeast Securities, agreed, saying “consumption and service industries will perform poorly in February” and conditions were not right for rapid withdrawal of stimulus. Last week, the Shanghai stock index recorded a loss of more than 3 per cent and short-term money rates spiked amid concern the People’s Bank of China was in the process of tightening credit conditions after the central bank unexpectedly drained liquidity from the bank system for three days in a row before adding money back on Friday. China’s top epidemiologist, Zhong Nanshan, said on Sunday the coronavirus outbreaks in the northern provinces of Hebei, Jilin and Heilongjiang could be brought under control this month due to strong restrictions. Beijing has also signalled its confidence they could be contained by March in time for the annual “two sessions” meetings of the National People‘s Congress and the Chinese People’s Political Consultative Conference.