Chinese economy under pressure as factory activity slows in August, services contract
BEIJING: Chinese businesses and the wider economy came under increasing pressure in August as factory activity grew at a slower pace as the service sector collapsed in the contraction, increasing the likelihood more short-term political support to stimulate growth.
The world’s second-largest economy has experienced an impressive recovery from a coronavirus crisis, but momentum has recently weakened due to national COVID-19 outbreaks, high commodity prices, slowing exports, measures more stringent to control house prices and a campaign to reduce carbon dioxide emissions.
The official manufacturing purchasing managers index (PMI) fell to 50.1 in August from 50.4 in July, data from the National Bureau of Statistics (NBS) showed on Tuesday, standing just above the 50 point bar separating growth from contraction.
Analysts polled by Reuters had expected it to drop to 50.2.
“Worse-than-expected August PMIs reinforce our belief that the slowdown in growth in the second half of the year could be quite noticeable,” Nomura economists wrote in a note.
“We expect Beijing to maintain its combination of ‘targeted tightening’ policies for a few sectors, especially real estate and heavily polluting industries, complemented by ‘universal easing’ for the rest of the economy.”
Nomura isn’t the only one who thinks many other analysts also expect the central bank to further reduce the amount of liquidity banks need to hold as reserves later this year to boost growth, in addition from last month’s reduction that released about 1 trillion yuan. ($ 6.47 trillion) in long-term liquidity in the economy.
The PMI manufacturing index showed demand fell sharply, with new orders contracting and a gauge for new export orders falling to 46.7, the lowest in more than a year. Factories also laid off workers, at the same rate as in July.
SLOWDOWN OF THE SERVICES SECTOR
Adding to signs of a widespread economic slowdown, COVID-19-related restrictions caused a sharp contraction in service sector activity for the first time since the pandemic peaked in February last year.
The official non-manufacturing PMI in August was 47.5, well down from July’s 53.3, according to NBS data.
âThe latest surveys suggest that the Chinese economy contracted (in August) as virus disruptions weighed heavily on service activity. Capital Economics, in a note.
While most of the weakness is expected to reverse with the easing of restrictions related to COVID-19, tighter credit conditions and weakening foreign demand will continue to weigh on the Chinese economy, he said. -he declares.
âThis epidemic in several provinces and localities has been quite a shock to the service sector, which is still recovering,â said Zhao Qinghe of the NBS.
The food services, transportation, accommodation and entertainment industries have been hit the hardest, Zhao said. Construction activity has accelerated at the fastest pace since March.
There are signs that China may have largely contained the latest coronavirus outbreaks, with no locally transmitted cases reported on August 30, for the third day in a row.
But it prompted authorities across the country to impose measures, including mass testing for millions of people, as well as varying degrees of travel restrictions and port closures.
The Meishan terminal at the Chinese port of Ningbo resumed operations in late August after closing for two weeks due to a COVID-19 case. The closure has caused congestion at ports in coastal regions of the country and further strained global supply chains amid resurgent consumer spending and shortages of container ships.
Rising commodity prices, especially metals and semiconductors, also weighed on earnings. Chinese industrial company profits in July slowed for the fifth consecutive month.
August’s official composite PMI index, which includes both manufacturing and services activity, fell to 48.9 from 52.4 in July.
(Reporting by Gabriel Crossley; Editing by Shri Navaratnam)