China April Factory Activity Contracts at Steeper Pace as Lockdowns Bite

Reuters
By Reuters
May 2, 2022China News
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China April Factory Activity Contracts at Steeper Pace as Lockdowns Bite
Workers at the entrance of a neighborhood during a COVID-19 lockdown in the Jing'an district in Shanghai on April 30, 2022. (Hector Retamal/AFP via Getty Images)

BEIJING—China’s factory activity contracted at a steeper pace in April as widespread COVID-19 lockdowns halted industrial production and disrupted supply chains, raising fears of a sharp economic slowdown in the second quarter that will weigh on global growth.

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

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

The headline PMI reading, combined with an even sharper crimp in services, offered the first clues into the performance of an economy ravaged by expanding COVID-19 curbs, such as an extended shutdown of the commercial hub, Shanghai.

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

In a statement, the statistics bureau linked COVID-19 disruptions to as significant decline in both demand and supply in the manufacturing sector.

“Some companies face difficulties in key raw material and component supplies, finished products sales and rising inventories,” the NBS said, with matters seen improving with the pandemic under control and the adoption of supporting policies.

Dozens of major Chinese cities are believed to be in full or partial lockdown, thanks to a strict COVID-19 policy.

With hundreds of millions stuck at home, consumption is taking a heavy hit, prompting more analysts to cut growth forecasts for the world’s second-largest economy.

The production sub-index slipped 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 the NBS.

Rising Risk of Recession?

Electric car maker Tesla has flagged a temporary drop in production due to the Chinese regime’s curbs after it said last week shutdowns had cost about a month of build volume at its Shanghai factory.

Tesla Shanghai Gigafactory
An aerial view of Tesla Shanghai Gigafactory in Shanghai on March 29, 2021. (Xiaolu Chu/Getty Images)

Some analysts are even warning of rising recession risks.

Apart from COVID curbs and heightened risks from the Ukraine War, persistently soft consumption, and a prolonged downturn in the property market are also weighing on growth, analysts say.

Moreover, analysts say traditional policy tools, such as interest rate cuts and larger liquidity injections, may have limited impact if lockdowns paralyze activity.

An abrupt U-turn to more aggressive easing could also spur more capital outflows, adding to headaches for policymakers.

China’s yuan currency fell more than 4 percent in April, its biggest monthly drop in 28 years, while stock markets have been the second worst performers this year after sanctions-hit Russia.

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

Construction equipment maker Caterpillar Inc. warned on Thursday that demand for excavators in China, one of its largest markets, could slip below pre-pandemic levels in 2022. Lockdowns have also hurt sales of companies such as General Electric Co. and 3M Co.

One banker at a top-ten Chinese bank said she had seen the greatest impact among small to medium-sized enterprises.

“The smaller borrowers, especially those in manufacturing are really suffering this time round, because they don’t have the cash reserves,” she said.

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