Manufacturing in China shrinks sharply as Covid infections rise

Manufacturing in China shrinks sharply as Covid infections rise

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A textile factory on December 30, 2022 in Jiangxi Province. China’s manufacturing activity shrank at its sharpest pace in nearly 3 years in December.

Vcg | Visual China Group | Getty Images

China’s factory activity shrank for a third straight month in December and at the sharpest pace in nearly three years as Covid infections swept through production lines across the country following Beijing’s sharp reversal of anti-virus measures.

The official purchasing managers’ index (PMI) fell to 47.0 from 48.0 in November, the National Bureau of Statistics (NBS) said on Saturday. Economists in a Reuters poll had expected the PMI to reach 48.0. The 50-point mark separates contraction from growth on a monthly basis.

The drop was the biggest since the early days of the pandemic in February 2020.

The data offer the first official snapshot of the manufacturing sector since China lifted the world’s strictest Covid restrictions in early December. Cumulative infections likely reached 18.6 million in December, UK-based health data firm Airfinity estimates.

Analysts said rising infections could cause temporary labor shortages and increased supply chain disruptions. This was reported by Reuters on Wednesday Tesla plans to manage a reduced production schedule at its Shanghai plant in Januaryextending reduced production that began this month into next year.

Weakening foreign demand amid rising fears of a global recession amid rising interest rates, inflation and the war in Ukraine could further slow China’s exports, hurt its massive manufacturing sector and hamper its economic recovery.

Although (the factory PMI) was lower than expected, it is actually difficult for analysts to provide a reasonable forecast given the uncertainty of the virus over the past month.”

Zhou Hao

Chief Economist, Guotai Junan International

“Most factories I know are way below what they could be at this time of year for next year’s orders. A lot of factories I’ve talked to are at 50%, some are under 20%,” said Cameron Johnson, partner at Tidalwave Solutions, a supply chain consulting firm.

“So even though China is opening up, manufacturing is still going to slow down because the rest of the world economy is slowing down.” Factories will have workers but no orders.”

The NBS said 56.3% of growers surveyed reported being severely affected by the outbreak in December, up 15.5 percentage points from the previous month, although most also said they expected the situation to gradually improve .

Hopes for recovery?

“Although (the factory PMI) was lower than expected, it is actually difficult for analysts to provide a reasonable forecast given the uncertainty of the virus over the past month,” said Zhou Hao, chief economist at brokerage Guotai Junan International.

“Overall, we believe the worst of the Chinese economy is behind us and a strong economic recovery is ahead.”

The country’s banking and insurance regulator pledged this week to boost financial support for small and private businesses in the restaurant and tourism sectors, which have been hit hard by the Covid-19 epidemic, stressing that recovering consumption will be a priority.

The non-manufacturing PMI, which looks at activity in the services sector, fell to 41.6 from 46.7 in November, NBS data showed, also marking the lowest reading since February 2020.

The official composite PMI, which combines manufacturing and services, edged down to 42.6 from 47.1.

“The weeks leading up to Chinese New Year will remain challenging for the services sector as people will be reluctant to go out and spend more than necessary for fear of getting infected,” said Mark Williams, chief Asia economist at Capital Economics.

“But the outlook should improve by the time people return from the Chinese New Year holiday – infections will have subsided and many people will have recently had Covid and feel they have some degree of immunity.”

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