Chinese economy rocked by Delta variant and supply chain issues

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An official survey of manufacturing activity fell to 50.1 in August from 50.4 in July. It was just above the 50 point mark indicating expansion rather than contraction, but still the slowest growth rate since the start of the pandemic. A private investigation into factory activity released on Wednesday also showed signs of unrest. The Caixin Manufacturing Purchasing Managers Index fell to 49.2 in August, indicating the first contraction since April 2020.
Service industries, which now represent a larger share of the world’s second-largest economy, have done even worse, according to the official survey. The non-manufacturing purchasing managers index plunged to 47.5 from 53.3 in July, the first contraction since February 2020.
China’s economy initially weathered the pandemic much better than many of its peers, growing last year as others shrank. But the fallout from the Delta variant and China’s zero Covid approach has taken its toll in recent weeks.
The country’s worst coronavirus outbreak in a year has prompted authorities to take drastic action to stop new infections, including city lockdowns, flight cancellations and trade suspensions. The aggressive and uncompromising strategy appears to have contained Delta – to the detriment of economic activity.

“The latest surveys suggest that the Chinese economy contracted last month as virus disruptions weighed heavily on service activity,” wrote Julian Evans-Pritchard, senior Chinese economist at Capital Economics, in a note search Tuesday. He added that the decline in the non-manufacturing PMI was entirely due to disruptions in the services sector, as “restrictions on movement have been reimposed and consumers have become more cautious amid the new outbreak of the virus.”

Persistent problems with the global supply chain made matters worse. Global trade has been in chaos for months as manufacturing resumes and consumer demand explodes, and supply chains have been further scolded by container shortages, coronavirus-related plant closures in Vietnam and the lingering effects of port closures in China.
A terminal at the Ningbo-Zhoushan port south of Shanghai has been closed for weeks after a dock worker tested positive for Covid-19, adding to a backlog caused by an earlier closure in the south of the China, home to some of the busiest container ports in the world.

“There continues to be signs of a supply shortage in the survey breakdown, with delivery times stretching further as companies continued to reduce their inventories of raw materials,” Evans-Pritchard wrote. .

However, Covid outbreaks and transportation issues are not all that China faces. Beijing has also embarked on a massive crackdown targeting businesses. Technology, private education and other industries have all been swept away.

The crackdowns – particularly in technology and education – “are impacting both employment problems among those affected and on consumer confidence in general as fears of broader interventions increase. Jeffrey Halley, senior market analyst for Asia-Pacific in Oanda, wrote on Monday.

Evans-Pritchard expected most of the weakness reported on Tuesday to reverse in September, as Covid cases are under control in China. But he said other concerns persist, noting that tight credit conditions are a “growing drag.”

“The result is that even looking at the volatility caused by the recent virus outbreak in China, the economy seems to be coming back to earth,” he added.


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