China’s factory activity slumped at the fastest pace in two years in March, as the domestic coronavirus resurgence and the economic fallout from the Ukraine war triggered sharp falls in production and demand, a business survey showed on Friday. The Caixin/Markit manufacturing purchasing managers’ index (PMI) fell to 48.1 in March, indicating the steepest rate of contraction since February 2020, from 50.4 in the previous month. The 50-point index mark separates growth from contraction on a monthly basis. The deterioration in manufacturing conditions was broadly in line with the official PMI released on Thursday, which showed activity contracted at the quickest rate since October 2021. Taken together with the official survey, they suggest the sharpest slowdown in industrial output since early 2020 Sheana Yue “The Caixin manufacturing index fell under 50 last month as measures to contain the latest virus outbreak weighed heavily on industrial activity. Taken together with the official survey, they suggest the sharpest slowdown in industrial output since early 2020,” said Sheana Yue, China economist at Capital Economics. “The average of the two is now under 50 and, apart from the initial pandemic hit in 2020, is now at its lowest since February 2016. Given the composition of the firms surveyed, the sharper reduction in the Caixin reading suggests the deterioration was more significant among smaller private firms and exporters.” The private-sector Caixin survey focuses more on small firms in coastal regions compared with the official survey. Both domestic and overseas demand fell. A subindex for new orders declined at the sharpest rate since February 2020 when China grappled with the first wave of virus outbreaks, leading to a 6.8 per cent contraction in gross domestic product in the first quarter of 2020. In particular, the decline in new export orders in March accelerated, as surveyed companies said the latest virus outbreaks in China, disruptions in shipping sector and greater market uncertainties from the Ukraine crisis led customers to cancel or suspend orders. Input cost inflation hit a five-month high, with a number of factories attributing higher prices to tight global supply chains, which was exacerbated by the war in Ukraine. The world’s second-largest economy, which picked up pace in the first two months of year, is now at risk of slowing sharply as authorities restrict production and mobility in virus-hit cities, including major economic centres like Shanghai and Shenzhen. Shanghai virus lockdowns spark ‘fear’, frustration among European businesses That has slowed output growth with the subindex for production at 46.4 in March, the lowest since February 2020. Government officials have vowed to roll out policies to stabilise the economy as downward economic pressure builds, a cabinet meeting said on Wednesday. One bright spot in the otherwise sluggish Caixin survey was the employment index, which expanded for the first time in eight months, as factories ramped up hiring after the Lunar New Year holiday. A variety of factors resonate, aggravating the downward pressure on China’s economy and underscoring the risk of stagflation Wang Zhe “Overall, impacted by factors including the Covid-19 outbreaks in multiple parts of China, manufacturing activity largely weakened in March. Supply contracted. Demand was also under pressure, and external demand worsened. The job market was more or less stable. Inflationary pressure continued to rise. And market optimism weakened,” said Wang Zhe, senior economist at Caixin Insight Group. “At present, China is facing the most severe wave of outbreaks since the beginning of 2020. Meanwhile, uncertainty increased abroad. “The prospect of the war between Russia and Ukraine is uncertain, and the commodity market convulsed. A variety of factors resonate, aggravating the downward pressure on China’s economy and underscoring the risk of stagflation.” Wang called for more help for vulnerable groups and small businesses, noting policymakers need to strike a balance between maintaining normal production and public health and safety.