China factory activity decline slows as COVID curbs easing

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China’s industrial activity shrank at a slower pace in May as lockdowns eased in major cities, even as ongoing COVID-19 restrictions clouded the outlook for the world’s second-largest economy.

The manufacturing industry’s official purchasing managers index (PMI) rose to 49.6 in May, from 47.4 in April, the National Bureau of Statistics (NBS) said Tuesday.

A reading of less than 50 on the index, which is based on a monthly survey of companies across China, indicates a contraction in activity.

China’s slowing factory activity comes amid signs of negative manufacturing spillovers in other leading Asian economies, including Japan and South Korea, both of which have reported sharp declines in industrial production.

While the PMI hit a three-month high, it remained below the 50-point mark separating contraction and growth for the third straight month.

“It shows that the impact of the COVID-19 outbreaks in May has not fully ended, leaving the economic outlook bleak since the second quarter of 2020,” said Pang Ming, chief economist at Huaxing Securities.

The declines in China’s midstream and downstream production were greater than upstream, and small businesses were hit harder than large companies, Pang said.

The manufacturing sub-index rose from 44.4 in April to 49.7 in May, while the new orders sub-index rose from 42.6 to 48.2.

“This showed that production and demand in the manufacturing sector have recovered to varying degrees, but the recovery momentum needs to be strengthened,” Zhao Qinghe, senior statistician at NBS, said in a statement accompanying the data release.

Although restrictions in key manufacturing hubs of Shanghai and the Northeast eased in May, analysts said the resumption of production was sluggish, limited by sluggish domestic consumption and dwindling global demand.

lukewarm recovery

Sheana Yue, an economist at Capital Economics, said that while activity has begun to recover as COVID-19 eases, the recovery is likely to remain lukewarm.

“Indeed, there are still signs of supply chain disruption in the survey breakdown,” Yue said. “Delivery times were further extended as companies continued to reduce their stocks of raw materials, albeit at a slower pace than in April.”

That would further hamper exports, which have lost momentum this year and cast a shadow over the economic recovery.

Many analysts expect the economy to contract in the April-June quarter from a year earlier, compared with growth of 4.8 percent in the first quarter.

China’s economy was beset by strict restrictions in April as the country struggled with its worst COVID-19 outbreak since 2020, with economic difficulties now in some ways worse than two years ago.

Profits of China’s industrial companies fell at the fastest rate in two years last month as high raw material prices and supply chain chaos weighed on margins.

In line with weakness in the manufacturing sector, services remained weak. The official PMI for non-manufactured goods rose to 47.8 in May from 41.9 in April.

As consumers were at home, retail sales contracted 11.1 percent in April from a year earlier, the biggest contraction since March 2020, with catering services and car sales particularly affected.

Activity in contact-intensive sectors is still contracting, pointing to significant pressure on the services sector, PMIs show.

The employment sub-index in the services sector fell to 45.3, down 0.5 points from April, indicating continued pressure on the labor market. This is likely to pose challenges for the government in a politically sensitive year, which has given priority to stabilizing employment.

China’s official composite PMI, which includes both manufacturing and services activities, came in at 48.4, up from 42.7.

With greater urgency to support the pandemic-hit economy, Prime Minister Li Keqiang reiterated the frontload of policy support last week and said China would aim for positive year-on-year economic growth in the second quarter.

Beijing has pledged to broaden tax cuts, delay social security payments and loan repayments and roll out new investment projects to support the economy, even though authorities have given no indication of an end to its ultra-strict zero-COVID policy.



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