Daily Management Review

China's Factory And Service Activity Slows Due To Ongoing COVID Restrictions


China's Factory And Service Activity Slows Due To Ongoing COVID Restrictions
Due to weakening global demand and strict domestic COVID-19 curbs, which had an adverse effect on production, travel, and shipping in the second-largest economy in the world, China's factory activity unexpectedly decreased in October.
Although China's economic growth exceeded expectations in the third quarter, a more robust recovery in factory and consumer activity is being clouded by ongoing COVID-19 curbs, a protracted real estate slump, and global recession risks.
The official purchasing managers' index (PMI) for manufacturing decreased to 49.2 from 50.1 in September, according to data released on Monday by the National Bureau of Statistics (NBS).
According to a Reuters poll of economists, the result unexpectedly fell below the 50-point threshold that separates growth from contraction. Had the PMI registered exactly 50.0, it would have indicated no change in the pace of activity.
"The official PMIs point to a further loss of momentum in this month as virus disruptions worsened and export orders remained under pressure," said Zichun Huang, Economist at Capital Economics in a research note.
"With the zero-COVID policy here to stay, we think the economy will continue to struggle heading into 2023."
Separately, the service sector activity-focused non-manufacturing PMI decreased from 50.6 in September to 48.7 this month.
Both of the major mainland Chinese indexes decreased following the PMI release. The offshore yuan lost 0.32 percent against the dollar before briefly rising.
According to Nomura, 31 cities had implemented various levels of lockdowns or district-based control measures as of last week, affecting about 232 million people.
The current zero-COVID policy in China is viewed by economists as a significant economic constraint, and they anticipate that restrictions will continue for some time following this month's Communist Party Congress.
This has caused some people to worry that Beijing's new political leadership may put stopping COVID-19 before promoting economic growth.
"We don't expect the zero-COVID policy to be abandoned until 2024, which means virus disruptions will keep in-person services activity subdued," said Huang from Capital Economics.
The outlook for the second-largest economy in the world was also adversely affected by slowing exports, a distressed real estate market, and the yuan's depreciation against the dollar, Huang added.
According to the most recent Reuters poll, growth in China is expected to be 3.2% in 2022, falling short of the country's estimated annual growth target of 5.5%. According to the poll, China's growth could reach 5.0% in 2023.
The new orders subindex of the manufacturing PMI survey showed contraction for the fourth consecutive month, pointing to weakening demand.
The war in Ukraine, higher interest rates, inflation, and declining external demand have all weighed on manufacturers.
In order to cut costs, factories had to reduce payrolls, which has increased concerns about a fragile labor market and has a negative impact on consumer confidence and consumption. Since March 2021, the employment index has decreased.
The official manufacturing PMI places a lot of emphasis on large, state-owned businesses. On Tuesday, the Caixin manufacturing PMI for the private sector, which focuses more on small businesses and coastal regions, will be released.
In order to stabilize the economy, Bruce Pang, chief economist at Jones Lang Lasalle, stated that China needs to speed up the construction of significant projects and increase investment in the fourth quarter, which is a customary construction season.