Factory activity in China unexpectedly shrinks in July with the outbreak of COVID

Employees work on a vehicle components production line during a government-organized media tour to a plant of German engineering group Voith, following the outbreak of the coronavirus disease (COVID-19), in Shanghai, China, July 21, 2022. REUTERS/Ali Song

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  • China’s official manufacturing PMI for July missed expectations
  • The official services PMI for July is growing at a slower pace
  • COVID flare-ups, cooling global demand, key risks to property
  • It is unlikely that there will be much stimulus, as the government omitted to mention the growth target

BEIJING (Reuters) – Chinese factory activity unexpectedly contracted in July after recovering from COVID-19 lockdowns the previous month, a survey showed on Sunday, as the novel coronavirus outbreak and a bleak global outlook weighed on demand.

The official manufacturing Purchasing Managers’ Index (PMI) fell to 49.0 in July from 50.2 in June, below the 50-point mark that separates contraction from growth, the National Bureau of Statistics (NBS) said.

Analysts polled by Reuters had expected it to improve to 50.4.

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“China’s economic prosperity level has declined, and the basis for recovery still needs to be strengthened,” Zhao Qinghe, chief statistician with the National Bureau of Statistics, said in a statement on the office’s website.

He said the ongoing contraction in the oil, coal and smelting industries was one of the main factors that led to the decline in the manufacturing PMI for July.

The reading was the lowest in three months, with the sub-indices of production, new orders and employment all contracting.

Chinese manufacturers continue to wrestle with rising raw material prices, which are putting pressure on profit margins, as the outlook for exports remains clouded by fears of a global recession.

Weak demand has hampered the recovery, Bruce Pang, chief economist and head of research at Jones Lang LaSalle, said in a research note. “Growth in the third quarter may face greater challenges than expected, as the recovery is slow and fragile.”

The official non-manufacturing PMI fell in July to 53.8 from 54.7 in June. The official composite PMI, which includes manufacturing and services, fell to 52.5 from 54.1.

China’s economy barely grew in the second quarter amid widespread shutdowns, and top leaders recently indicated that their strict non-proliferation policy for the novel coronavirus will remain a top priority. Read more

After a high-level meeting of the ruling Communist Party, state media reported that policy makers are ready to miss the GDP target of “around 5.5%” for this year. Read more

Beijing’s decision to drop mention of the growth target has fueled speculation that the authorities will implement massive stimulus measures, as they have done in previous recessions.

Capital Economics says policy adjustment, along with the continuing threat of more shutdowns and weak consumer confidence, is likely to make China’s economic recovery more protracted.

faltering recovery

After picking up in June, the recovery in the world’s second-largest economy has faltered as the outbreak of COVID tightens restrictions on activity in some cities, while the once-strong real estate market teeters from one crisis to the next.

Chinese manufacturers are still grappling with rising raw material prices, shrinking profit margins, and export prospects clouded by fears of a global recession.

The southern Chinese metropolis of Shenzhen has pledged to “mobilize all resources” to slow the spread of the coronavirus, ordering strict implementation of tests and temperature checks, and the closure of buildings affected by the coronavirus. Read more

The port city of Tianjin, home to factories linked to Boeing (BA.N) and Volkswagen, and other regions tightened restrictions this month to combat the new outbreak. Read more

According to Global Economies, the lockdown measures had some impact on 41% of Chinese companies in July, although its index of confidence in the manufacturing sector rose significantly from 50.2 in June to 51.7 in July.

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Reporting by Beijing Newsroom; Editing by Himani Sarkar and William Mallard

Our Standards: Thomson Reuters Trust Principles.

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