Daily Management Review

Contraction In Both Chinese Manufacturing, And Services Sectors For First Time Since 2020


Contraction In Both Chinese Manufacturing, And Services Sectors For First Time Since 2020
For the first time since the peak of China's COVID-19 pandemic in 2020, manufacturing and service activity in March fell at the same time, highlighting the need for stronger governmental action to stabilise the economy.
The official manufacturing Purchasing Managers' Index (PMI) dipped to 49.5 in March from 50.2 in February, according to the National Bureau of Statistics (NBS), while the non-manufacturing PMI fell to 48.4 in March from 51.6 in February. find out more
The last time both PMI indices fell below the 50-point threshold that separates contraction from growth was in February 2020, when officials were trying to stop the spread of the coronavirus, which had been discovered in Wuhan, central China.
The world's second-largest economy accelerated in January-February, with some key indicators exceeding forecasts, but it now faces a steep slowdown as authorities restrict production and transportation in COVID-affected cities such as Shanghai and Shenzhen.
"Recently, clusters of epidemic outbreaks have occurred in many places in China, and coupled with a significant increase in global geopolitical instability, production and operation of Chinese enterprises have been affected," said Zhao Qinghe, senior NBS statistician.
The COVID-19 lockdown in Shanghai has roiled car manufacturing in recent days, as two key suppliers joined Tesla in shutting down operations to comply with coronavirus control measures.
"PMI weakened as the Omicron outbreaks in many Chinese cities led to lockdowns and disruption of industrial production," said Zhiwei Zhang, chief economist at Pinpoint Asset Management.
"As the Shanghai lockdown only happened in late March, economic activities will likely slow further in April."
For the first time since October, the production sub-index went below 50 points, at 49.5, suggesting a contraction. The indicator for new orders was also in the red.
"Due to the epidemic outbreaks, some companies in some areas temporarily reduced production or stopped production, which also affected the normal production and operation of both upstream and downstream companies," Zhao said.
According to Zhao, several companies have seen their overseas orders cancelled or reduced as a result of geopolitical uncertainty.
Weakened production and demand has accelerated the loss of factory jobs, with the employment sub-index falling to 48.6 in March, the lowest level since February 2021.
"The PMIs probably understate the hit to activity last month," said Julian Evans-Pritchard, senior China economist at Capital Economics.
"The services index remained above the low of 45.2 that it hit last August during the Delta wave. That's probably because the survey was conducted prior to the worst disruptions."
Authorities have announced efforts to support business, including rent exemptions for some small service-sector enterprises, to mitigate the impact of new COVID-19 lockdowns.
The administration announced on Wednesday that, in the face of mounting demands, it will implement actions to stabilise the economy as quickly as feasible.
As downward economic pressures increase, economists expect the central bank to slash rates and lower reserve requirements for banks, despite keeping its benchmark interest rate for business and consumer loans constant in March.
In March, China's official composite PMI, which includes manufacturing and services, was 48.8, down from 51.2 in February.
Since February 2020, when the initial COVID epidemic brought the index tumbling to 28.9, the composite PMI has been at its second-lowest reading on record.
"This suggests that the economy is contracting at its fastest pace since the height of the initial COVID-19 outbreak in February 2020," said Evans-Pritchard.