China’s manufacturing activity contracts in April at a slower pace, as lockdowns bite

Employees working on the production line of carbon fiber badminton rackets at a factory in Sihong County, Suqian City, Jiangsu Province in China. China reported on Saturday that manufacturing activity in April fell at a slower pace as Covid-19 lockdowns halted industrial production and disrupted supply chains.

Visual China Group | Getty Images

China’s manufacturing activity fell at a slower pace in April as widespread Covid-19 lockdowns halted industrial production and disrupted supply chains, raising fears of a sharp second-quarter economic downturn that will weigh on global growth.

The official Production Purchasing Managers’ Index (PMI) fell to 47.4 in April from 49.5 in March, for the second month in a row with contraction, the National Bureau of Statistics (NBS) said Saturday. It was the lowest since February 2020.

A poll by Reuters had expected the PMI to fall to 48, well below the 50-point mark that separates the decline from growth on a monthly basis.

The headline PMI reading, combined with an even sharper shrinkage of services, provided the first clues to the performance of an economy ravaged by expanded Covid curbs, such as an extended closure of the Shanghai commercial hub.

Factory activity fell at its steepest pace in 26 months, a Caixin survey of private business showed, with the new export order index falling to its lowest level since June 2020, suggesting a weakening in one of the few bright spots in the economy.

In a statement, the statistics agency Covid disturbed links with a significant decline in both demand and supply in the manufacturing sector.

“Some companies are facing difficulties with key raw materials and component supplies, sales of finished products and increasing inventories,” NBS said, with conditions seen improved with the pandemic under control and the adoption of supporting policies.

Dozens of major Chinese cities are believed to be completely or partially closed, thanks to a strict Covid policy.

With hundreds of millions stuck in the home, consumption has been hit hard, prompting more analysts to cut growth forecasts for the world’s second-largest economy.

The production sub-index fell to 44.4 in April from 49.5 a month earlier, while new orders fell to 42.6 from 48.8 in March, according to NBS.

Increasing risk of recession?

Electric car maker Tesla has marked a temporary drop in production due to China’s curbs, after it said last week that shutdowns had cost about a month’s construction volume at the Shanghai plant.

Some analysts even warn of rising recession risks, saying politicians need to provide more stimulus to reach an official 2022 growth target of around 5.5%.

Aside from Covid constraints and increased risks from the Ukraine war, persistent soft spending and a longer downturn in the real estate market also weigh on growth, analysts say.

Authorities have promised more help to strengthen confidence and avert further job losses in a politically sensitive year.

Read more about China from CNBC Pro

China will step up political support, the Politburo, a supreme decision-making body of the ruling Communist Party, has said, giving some cheers to the affected stock markets.

However, analysts say their task will be more difficult unless China eases its zero-Covid policy, which it has shown little sign of doing.

“While these (official) messages are positive, the key is about the specific policies and their implementation,” Zhiwei Zhang, president and chief economist of Pinpoint Asset Management, said in a customer note on Friday.

In addition, analysts say that traditional policy tools, such as interest rate cuts and larger liquidity injections, may have limited impact if shutdowns paralyze activity.

The smaller borrowers, especially those in the manufacturing sector, are really suffering this time because they do not have the liquidity reserve.

Banker in a Chinese top bank

President Xi Jinping chaired a meeting of top executives this week that announced a major infrastructure push to boost demand, reinforcing Beijing’s preference for major ticketing projects to boost growth.

But such projects take time, and Beijing is seen as on guard against another massive stimulus program, such as its spending of 4 trillion yuan ($ 605.82 billion) during the global financial crisis of 2008 and 2009, which created a mountain of debt.

An abrupt U-turn to more aggressive easing can also spur more capital flows, increasing headaches for politicians.

China’s yuan currency fell more than 4% in April, the largest monthly decline in 28 years, while stock markets have performed second best this year after sanctioned Russia.

China’s gross domestic product (GDP) grew 4.8% in the first quarter compared to a year earlier, beating analysts’ expectations of a 4.4% increase, but data from March weakened sharply with a decline in retail sales and the highest unemployment since May 2020.

A sub-index of construction activity, a major economic driver, Beijing hoped would support growth this year, stood at 52.7 in April, down from 58.1 in March.

Contractor equipment manufacturer Caterpillar Inc warned on Thursday that demand for excavators in China, one of its largest markets, could fall below pre-pandemic levels in 2022. Closures have also hurt sales of companies like General Electric and 3M.

A banker at a top-ten Chinese bank said she had seen the biggest impact among small and medium-sized businesses.

“The smaller borrowers, especially those in the manufacturing sector, are really suffering this time because they do not have the liquidity reserves,” she said.

Leave a Comment

Your email address will not be published.