China’s production shrinks sharply as Covid infections increase

A textile factory on December 30, 2022 in Jiangxi Province. Chinese manufacturing activity fell at its sharpest pace in nearly three 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 Beijing̵[ads1]7;s abrupt 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 come in at 48.0. The 50-point mark separates contraction from growth on a monthly basis.

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

The data provided the first official snapshot of the manufacturing sector after China lifted the world’s strictest Covid restrictions in early December. Cumulative infections likely reached 18.6 million in December, British health data firm Airfinity estimated.

Analysts said rising infections could cause temporary labor shortages and increased supply chain disruptions. Reuters reported that on Wednesday Tesla plans to run a reduced production schedule at its Shanghai factory in January, extending the reduced production it started this month into next year.

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

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

Zhou Hao

chief economist, Guotai Junan International

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

“So even if China opens up, manufacturing is still going to slow down because the rest of the world economy is slowing down. Factories want workers, but they don’t want any orders.”

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

Hope for recovery?

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

“Overall, we believe the worst for the Chinese economy is behind us and a strong economic recovery is in store.”

The country’s banking and insurance regulator pledged this week to step up financial support for small and private businesses in the catering and tourism sectors hit hard by the Covid-19 epidemic, stressing that a recovery in consumption will be a priority.

China’s production shrinks sharply as Covid infections increase

The non-industry 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, fell to 42.6 from 47.1.

“The weeks leading up to Chinese New Year are going to remain challenging for the services sector as people don’t want 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 brighten around the time people return from the Chinese New Year holidays – infections will have receded and a large proportion of people will have recently had Covid and feel they have some degree of immunity.”

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