China’s factory and service sectors shake off 3 months of lockdown pain

A worker polishes a bicycle steel rim at a sports equipment manufacturing factory in Hangzhou, Zhejiang province, China September 2, 2019. China Daily via REUTERS

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  • Factory in China, services PMI above 50 for the first time since February
  • Replay seen as COVID restrictions partially ease
  • GDP growth target for 2022 still seen as ambitious

BEIJING, June 30 (Reuters) – China’s factory and service sectors recorded three months of declines in June, business surveys showed on Thursday, as authorities lifted a strict lockdown on the COVID in Shanghai, reviving production and consumer spending.

The official Purchasing Managers’ Index (PMI) for the manufacturing sector fell from 49.6 in May to 50.2 in June, the National Bureau of Statistics (NBS) said.

That slightly beat a forecast of 50.5 in a Reuters poll, but topped the 50-point mark that separates contraction from growth for the first time since February.

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While activity has picked up since various COVID lockdowns imposed since March were rolled back, headwinds persist, including a still-sluggish housing market, weak consumer spending and fear of any recurring wave of infections.

“Today’s NBS numbers were encouraging to see, although manufacturing was slightly disappointing and expectations were for improvement given the easing of lockdown restrictions,” said Matt Simpson, senior analyst at the market at City Index.

Investors cheered signs of economic recovery with China’s major stock indexes up more than 1% and poised for their biggest monthly rise in nearly two years.

A production sub-index came in at 52.8, the highest since March 2021, while new orders also slipped back into expansion territory for the first time in four months, although growth remained weak.

“Even though the manufacturing sector continued to recover this month, 49.3 percent of businesses said they were short on orders,” said Zhu Hong, senior statistician at NBS. “Weak market demand remains the main problem facing the manufacturing industry.”

“Some companies have faced squeezed profit margins and relatively huge operating difficulties,” Zhu added.

The Shenzhen factory center was closed for a week in March while Shanghai, located in the heart of the Yangtze River Delta manufacturing area, was under a strict lockdown for about two months before restrictions were lifted on June 1st.

A survey from Amcham China showed on Thursday that supply chains received some relief in June, with fewer companies reporting COVID-related disruptions, but an overwhelming 98% of companies in the survey are still feeling the impact. negative of COVID on their activity.

Analysts expect economic conditions to improve further in the third quarter, although the official GDP target of around 5.5% for this year will be difficult to achieve unless the government abandons the zero COVID strategy. .

“This surge in economic activity will likely maintain momentum through July, when further easing of mobility restrictions will take place,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management.

“Nevertheless, China is sticking to the zero COVID policy. I think that means economic growth is likely to remain below potential before the policy is eased further.”

The government said this week it would reduce COVID-19 quarantine requirements for international travelers and remove an indication of travel through COVID-affected cities on a state-mandated mobile app for its citizens, opening the way to greater exchanges of people and goods. Read more

However, President Xi Jinping defended the zero COVID policy on Tuesday, saying China was willing to accept a temporary impact on economic development rather than damage to people’s health. Read more

STRONG REBOUND IN SERVICES

The official non-manufacturing PMI in June improved to 54.7 from 47.8 in May.

The services industry recorded an impressive rebound, the fastest in 13 months, with sectors that have been hit hard by COVID-related restrictions, such as retail and road transport, catching up with previously depressed demand.

However, social distancing rules such as those on dining out were still in place in Shanghai throughout June.

An index for construction activity also rose to 56.6 from 52.2.

In order to stabilize growth and bring unemployment under control, China’s State Council recently announced a comprehensive economic support package and Premier Li Keqiang pledged to achieve reasonable economic growth in the second quarter.

China’s official composite PMI, which includes both manufacturing and services, came in at 54.1, down from 48.4 in May.

However, some analysts doubt that the momentum can be sustained over the medium to long term.

“PMI employment indexes continue to point to weakness in the labor market, suggesting that household finances and consumer confidence remain fragile,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

“Once the reopening stimulus fades, it will weigh on any further recovery. And relative to 2020, the economy will benefit from fewer tailwinds from export demand and stimulus measures.”

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Reporting by Stella Qiu, Ellen Zhang, Ella Cao and Ryan Woo; Editing by Sam Holmes

Our standards: The Thomson Reuters Trust Principles.

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