China’s January factory activity contracts as COVID-19 lockdowns bite

Chinese factory activity contracted at the fastest pace in 23 months in January, underscoring the huge economic costs of the country’s ‘COVID zero’ approach as surging cases and strict containment measures weighed on production and demand, a private investigation revealed on Sunday.

The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) fell to 49.1 in January – its lowest level since February 2020, when the economy was still suffering from nationwide COVID-19 lockdowns in start of the pandemic.

Economists in a Reuters poll had expected the index to fall to 50.4 from 50.9 in December, but still point to some growth. The 50 mark separates growth from contraction on a monthly basis.

The surprisingly weak reading is likely to bolster market expectations that policymakers need to deploy more supportive measures to stabilize the faltering economy. China’s central bank has already started cutting interest rates and injecting more liquidity into the financial system to reduce borrowing costs, and further modest easing measures are expected in the coming weeks.

A factory production sub-index came in at 48.4, down from 52.7 in December, as surveyed firms reported reduced new business inflows and a recent rise in COVID-19 cases. and strict anti-virus measures impacted production, the survey showed.

Demand also plunged as new orders fell at the fastest rate since August this year and export orders fell the most since May 2020. Exports were one of the few bright spots in the l Chinese economy in the second half of last year.

Tesla Model 3 vehicles made in China during a delivery event at its Shanghai factory in January 2020. | Reuters

This has led to renewed pressure in the labor market, with a jobs gauge falling to the lowest in nearly two years.

“From December to January, the resurgence of COVID-19 in several regions, including Xian and Beijing, forced local governments to tighten epidemic control measures, which restricted the production, transportation and sales of manufactured goods,” said Wang Zhe, senior economist at Caixin Insight Group. noted.

“It has become more evident that the Chinese economy is being strained under the triple pressure of contracting demand, supply shocks and weakening expectations.”

A spike in COVID-19 cases since late December in the manufacturing hub of Xian has forced many auto and chipmakers to shut down operations, though production has gradually returned to normal as the city emerges from lockdown. a lock.

Inflationary pressures also rose slightly in January as manufacturers’ confidence in the year ahead picked up as companies remained confident that China would be able to bring COVID-19 under control.

The world’s second-largest economy got off to a strong start in 2021, rebounding from the pandemic-induced recession of 2020, but began to falter in early summer, weighed down by growing debt problems in the housing market and the COVID-19 outbreaks that hit consumer spending.

The International Monetary Fund on Wednesday lowered its growth forecast for China for 2022 to 4.8% from 5.6% previously, reflecting the housing slowdown and the impact on consumption of tough coronavirus restrictions.

The economy grew 4.0% in the fourth quarter from a year earlier, its weakest expansion in a year and a half.

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