China’s economic recovery continues to stall as factory activity contracts for first time since April 2020
- The Caixin/Markit manufacturing purchasing managers’ index (PMI) fell to 49.2 in August from 50.3 in July
- In data released on Tuesday, China’s official manufacturing PMI dropped to 50.1 in August from 50.4 in July
China’s factory activity slipped into contraction in August for the first time in nearly one and a half years as coronavirus containment measures, supply bottlenecks and high raw material prices weighed on output in a blow to the economy.
“The surveys point to worsening supply shortages amid the Delta outbreak. But there are also signs that demand is weakening too. The average of the two [manufacturing surveys] is now under 50 and, apart from the pandemic hit last year, is now at its lowest since June 2019,” said Julian Evans-Pritchard, senior China economist at Capital Economics.
“The breakdown of both surveys points to a contraction in output last month. Supply bottlenecks are partly to blame. Respondents to the surveys noted that restrictions to contain the renewed virus flare-up impacted their suppliers’ performance, resulting in worsening transportation delays and a draw down on their inventories.
“Both the new orders and export orders components fell and are now under 50 which implies that more firms are reporting a fall in orders than a rise. Tight credit conditions appear to be weighing on domestic demand, especially for construction materials. And foreign demand looks to be softening as global consumption patterns normalise amid reopening.”
The result was well below expectations by analysts polled by Reuters, who had forecast the index at 50.2. New export orders tumbled into contraction for the first time since February, while factories laid off more workers than they hired.
“The latest Covid-19 resurgence has posed a severe challenge to the economic normalisation that began in the second quarter of last year,” said Wang Zhe, senior economist at Caixin Insight Group.
A subindex for production fell to 47.7, the slowest pace of expansion since February last year at the height of the pandemic, while another subindex for new orders slipped to 48.0.
Companies reported Covid-19 restrictions had dampened demand and led to sourcing difficulties, while a shortage of chips has also been crimping manufacturing.
“Due to the lack of chips this year, the demand for auto parts has decreased,” said an car parts exporter in eastern China’s Suzhou surnamed Huang.
“Our factory has been continuously reducing production, and in July and August, I heard that some factories stopped production. At the moment it looks like chips will continue to be in short supply.”
An index of confidence in the year ahead stood steady. Input and output prices continued to rise and at a faster pace.
“Official economic indicators for July were worse than the market expected, indicating mounting downward pressure on economic growth,” Caixin’s Wang said.
“Authorities need to take a holistic view and balance containing Covid-19, stabilising the job market, and maintaining stability in supply and prices.”