China’s economy under pressure as factory activity slows in August, service contract

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A worker wearing a face mask works on a production line that manufactures steel wheels for bicycles in a factory, as the country is affected by the new coronavirus outbreak, in Hangzhou, Zhejiang Province, China, on 2 March 2020. China Daily via REUTERS

  • Twin PMI surveys point to growing pressure on companies
  • Surveys suggest that the economy contracted in August – economist
  • The high prices of raw materials, the braking of the COVID-19 harms the economy
  • Analysts expect more policy support by the end of the year

BEIJING, Aug 31 (Reuters) – Chinese companies and the economy as a whole came under increasing pressure in August as factory activity expanded at a slower pace, while the sector of services fell in contraction, increasing the likelihood of more short-term policy support to drive growth.

The world’s second largest economy carried out an impressive recovery from a coronavirus drop, but the momentum has recently weakened due to domestic outbreaks of COVID-19, high commodity prices, the slowdown of exports, tighter measures to tame real estate prices and the campaign to reduce carbon emissions.

The official index of manufacturing purchasing managers (PMI) fell to 50.1 in August, from 50.4 in July, data from the National Statistics Office (NBS) showed on Tuesday. which remained just above the 50-point mark separating growth from contraction.

Analysts polled by Reuters expected it to drop to 50.2.

“The August PMIs, worse than expected, add to the conviction in our view that the slowdown in growth in H2 could be quite noticeable,” Nomura economists wrote in a note.

“We hope Beijing will maintain its political combination of ‘targeted tightening’ for some sectors, especially the real estate sector and highly polluting industries, complemented by ‘universal relaxation’ for the rest of the economy.”

Nomura is not alone in his view, as many other analysts also expect the central bank to implement a further reduction in the amount of cash banks will have to hold as reserves later this year to boost growth. , in addition to last month’s cut that released about one trillion yuan ($ 6.47 trillion) in long-term liquidity for the economy.

The manufacturing PMI showed that demand fell sharply, with the hiring of new orders and an indicator for new export orders falling to 46.7, the lowest in a year. Factories also laid off workers, at the same rate as in July.

DOWNTURN SERVICES SECTOR

In addition to the signs of an expanding economic slowdown, restrictions related to COVID-19 led service sector activity to a 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 below July’s 53.3, NBS data showed.

“Recent polls suggest that the Chinese economy contracted (in August), as virus outages weighed heavily on service activity. The industry also continued to disappear as bottlenecks the supply chain worsened and demand softened, ”said Julian Evans-Pritchard, a senior economist in China. Capital Economics, in a note.

While most of the weakness should be reversed with the relaxing restrictions of COVID-19, strict credit conditions and weakening foreign demand will continue to weigh on the Chinese economy, he said.

“This epidemic in several provinces and locations was a major shock to the service industry, which is still recovering,” said Zhao Qinghe of the NBS.

Zhao said the catering, transportation, accommodation and entertainment industries were the hardest hit. Construction activity accelerated at the fastest pace since March.

There are indications that China could contain much of the latest coronavirus outbreaks, with zero cases of local transmission reported on August 30, for the third day in a row.

But he encouraged authorities across the country to impose measures that would include massive tests for millions of people, as well as travel restrictions of varying degrees and port stops.

The Meishan terminal in the Chinese port of Ningbo resumed operations in late August after closing for two weeks due to a COVID-19 case. The closure caused traffic jams in ports in the country’s coastal regions and further tightened global supply chains amid a resurgence in consumer spending and the shortage of container vessels.

Higher commodity prices, especially metals and semiconductors, have also put pressure on profits. China’s industrial enterprises’ gains in July slowed for the fifth month in a row.

The official PMI for August, which includes both manufacturing and service activity, fell to 48.9 from 52.4 in July.

Report by Gabriel Crossley Edited by Shri Navaratnam

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