China’s economy under pressure as factory activity slowed last month

BEIJING — China’s businesses and the broader economy came under increasing pressure last month as factory activity expanded at a slower pace while the services sector slumped into contraction, hurt by coronavirus-related restrictions and high raw material prices.

The world’s second-biggest economy staged an impressive recovery from a coronavirus-battered slump, but growth has recently shown signs of losing steam due to domestic coronavirus disease 2019 (COVID-19) outbreaks, slowing exports, tighter measures to tame hot property prices and a campaign to reduce carbon emissions.

The official manufacturing Purchasing Manager’s Index (PMI) was 50.1 in August from 50.4 in July, data from the National Bureau of Statistics (NBS) showed on Tuesday.

The 50-point mark separates growth from contraction. Analysts polled by Reuters had expected it to slip to 50.2.

“The latest surveys suggest that China’s economy contracted (in August) as virus disruptions weighed heavily on services activity. Industry also continued to come off the boil as supply chain bottlenecks worsened and demand softened,” said Julian Evans-Pritchard, senior China economist at Capital Economics, in a note.

While most of the weakness should reverse with relaxing COVID-19 restrictions, tight credit conditions and weakening foreign demand will continue to weigh on China’s economy, he said.

In a worrying sign for China’s slow consumption recovery, a gauge of activity for the services sector in August slipped into sharp contraction for the first time since the height of the pandemic in February last year.

The official non-manufacturing PMI in August was 47.5, well down from July’s 53.3, data from the National Bureau of Statistics (NBS) showed.

“This epidemic in multiple provinces and locations was a fairly big shock to the services industry, which is still in recovery,” said Zhao Qinghe, of the NBS.

Catering, transportation, accommodation and entertainment industries were most affected, said Zhao. Construction activity accelerated to the fastest pace since March.

China’s latest coronavirus outbreaks appear to have been largely brought under control, with zero locally transmitted cases reported on Aug 30., for the third day in a row.

But it spurred authorities across the country to impose measures including mass testing for millions of people as well as travel restrictions of varying degrees and port shutdowns.

The manufacturing PMI showed demand slipped sharply, with new orders contracting and a gauge for new export orders falling to 46.7, the lowest in over a year. Factories also laid off workers, at the same pace as July.

Meishan terminal at China’s Ningbo port resumed operations in late August after shutting down for two weeks due to a COVID-19 case. The closure caused logjams at ports across the country’s coastal regions and further strained global supply chains amid a resurgence of consumer spending and a shortage of container vessels.

Higher raw material prices, especially of metals and semiconductors, have also pressured profits. Earnings at China’s industrial firms in July slowed for the fifth straight month.

In July the People’s Bank of China (PBOC) cut the amount of cash banks must hold as reserves in mid July, releasing around one trillion yuan ($6.47 trillion) in long-term liquidity to support the economy.

Many analysts expect another cut later in the year.

The official August composite PMI, which includes both manufacturing and services activity, fell to 48.9 from July’s 52.4. —