China factory activity decline slows as COVID containments ease | coronavirus pandemic

China’s industrial activity shrank at a slower pace in May as lockdowns in major cities eased, although ongoing COVID-19 restrictions clouded the outlook for the world’s second-largest economy.

The official purchasing managers’ index (PMI) for manufacturing rose to 49.6 in May from 47.4 in April, the National Bureau of Statistics (NBS) said on Tuesday.

A reading below 50 on the index, which is based on a monthly survey of businesses across China, indicates a slowdown in activity.

China’s slowing factory activity comes amid signs of a negative impact on production in other leading Asian economies, including Japan and South Korea, both of which have reported sharp falls in industrial production.

While hitting a three-month high, the PMI remained below the 50-point mark, which separates contraction from growth, for the third straight month.

“It shows that the impact of the COVID-19 outbreaks has not fully ended in May and the economic outlook has been bleak since the second quarter of 2020,” said Pang Ming, chief economist at Huaxing Securities.

The declines in China’s midstream and downstream manufacturing are larger than upstream, and small firms are hit harder than large firms, Pang said.

The manufacturing sub-index rose to 49.7 in May from 44.4 in April, while the new orders sub-index rose to 48.2 from 42.6.

“This showed that manufacturing output and demand have recovered to varying degrees, but the recovery momentum needs to be strengthened,” said Zhao Qinghe, senior statistician at the NBS, in a statement accompanying the data release.

Although restrictions in key manufacturing hubs Shanghai and the Northeast were eased in May, analysts said the resumption of production was slow, being hampered by sluggish domestic consumption and slowing global demand.

Mild relaxation

Sheana Yue, an economist at Capital Economics, said while activity has bounced back with the easing of COVID-19 containment, the recovery is likely to remain tepid.

“Actually, there are still signs of supply chain disruptions in the survey breakdown,” Yue said. “Delivery times continued to lengthen as companies continued to deplete their stockpiles of raw materials, albeit at a slower rate than in April.”

This would further hamper exports, which have lost momentum this year and overshadowed the economic recovery.

Many analysts expect the economy to contract in the April-June quarter from a year earlier, compared to growth of 4.8 percent in the first quarter.

China’s economy was hit by severe restrictions in April as the country grappled with the worst COVID-19 outbreak since 2020 and economic difficulties are now worse in some aspects than two years ago.

Chinese manufacturing profits fell last month, the sharpest in two years, as high commodity prices and supply chain chaos squeezed margins.

Services remained weak in line with weakness in the factory sector. The official non-manufacturing PMI rose to 47.8 in May from 41.9 in April.

With consumers confined to their homes, April retail sales fell 11.1 percent year-on-year, the biggest drop since March 2020, with catering services and auto sales particularly hard hit.

Activity in contact-intensive sectors was still declining, indicating significant pressure on the service industry, PMIs showed.

The services employment sub-index slipped to 45.3, down 0.5 point from April, signaling continued labor market pressures. This is likely to pose challenges for the government in a politically sensitive year that has prioritized job stabilization.

China’s official composite PMI, which includes both manufacturing and services activities, rose to 48.4 from 42.7.

Amid greater urgency to support the pandemic-hit economy, Premier Li Keqiang last week reiterated the frontloading of policy support, saying China will aim for positive year-on-year economic growth in the second quarter.

Beijing has promised to expand tax rebates, delay social security payments and loan repayments, and launch new investment projects to prop up the economy, though authorities have given no indication of an end to the ultra-tight zero-COVID policy.

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