Chinese manufacturing contracts sharply as COVID infections soar

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BEIJING (Reuters) – Chinese factory activity has shrunk at the fastest rate since the outbreak of the pandemic nearly three years ago, after Beijing’s abrupt reversal of anti-epidemic measures this month sparked a wave of COVID infections across the country.

The official Purchasing Managers’ Index (PMI) fell to 47.0 in December from 48.0 in November, the National Bureau of Statistics (NBS) said on Saturday. Economists in a Reuters poll had expected the PMI to come in at 48.0. The 50 point mark separates contraction from growth on a monthly basis.

The decline was the largest since the early days of the pandemic in February 2020.

The data offered the first official snapshot of the manufacturing sector after China scrapped the world’s toughest COVID restrictions in early December. Cumulative infections likely reached 18.6 million in December, British health data firm Airfinity estimated.

Analysts said the spike in infections could lead to temporary labor shortages and increased supply chain disruptions. Reuters reported on Wednesday that Tesla plans to run a reduced production schedule at its Shanghai factory in January, extending the reduced production started this month into next year.

Weakening external demand amid growing fears of a global recession amid rising interest rates, inflation and war in Ukraine could further slow China’s exports, hurt its massive manufacturing sector and hamper a economic recovery.

“Most of the factories I know are way below what they could be at this time of year for next year’s orders. Many of the factories I’ve spoken to are at 50%, some are below 20%,” said Cameron Johnson, partner at Tidalwave. Solutions, a supply chain consulting firm.

“So even if China opens up, manufacturing will still slow down because the rest of the global economy is slowing down. Factories will have workers, but they won’t have orders.”

RESUME HOPES

The NBS said 56.3% of manufacturers surveyed said they were heavily impacted by the outbreak in December, up 15.5 percentage points from the previous month, although most also said they expected that the situation gradually improves.

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Chinese President Xi Jinping, in his New Year’s address on state television, said China’s economic output in 2022 is expected to top 120 trillion yuan ($17.4 trillion).

In 2021, inflation-adjusted gross domestic product reached 114.92 trillion yuan, up 8.4% from 2020.

GDP grew by 3% in the first nine months of 2022, against China’s official full-year target of around 5.5%. The World Bank expects growth of 2.7% in 2022.

China’s banking and insurance regulator this week pledged to boost financial support for small businesses and private enterprises in the catering and tourism sectors that have been hit hard by the COVID-19 outbreak, stressing that a recovery in consumption will be a priority.

The non-manufacturing PMI, which examines service sector activity, fell to 41.6 from 46.7 in November, according to BNS data, also marking the lowest reading since February 2020.

The official composite PMI, which combines manufacturing and services, fell to 42.6 from 47.1.

“The weeks leading up to Chinese New Year are going to remain tough for the services sector as people won’t want to go out and spend more than necessary for fear of catching an infection,” said Mark Williams, chief Asia economist at Capital Economics.

“But the outlook should brighten by the time people return from the Chinese New Year holidays, infections have receded, and a large portion of people will have recently had COVID and feel they have some degree of immunity.”

($1 = 6.8972 Chinese yuan renminbi)

(Reporting by Ryan Woo, Joe Cash and Ellen Zhang; Editing by Sam Holmes, Kim Coghill and Alison Williams)

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