Chinese production drops in January as demand hit by Covid-19

China’s manufacturing activity growth slowed in January as a resurgence of Covid-19 cases and tight lockdowns hit production and demand, but the slight expansion offered some signs of resilience as the world’s second-largest economy enters into a tailspin. a likely turbulent new year.

The industry’s official Purchasing Managers’ Index (PMI) registered 50.1 in January, staying above the 50-point mark that separates growth from contraction, but slowing from 50.3 in December, National data showed. Bureau of Statistics (NBS) on Sunday.

Analysts had expected the PMI to drop to 50.

The official results contrasted with those of a private survey of mostly small manufacturers in coastal regions, which showed that activity fell at the fastest pace in 23 months.

China’s economy started strong last year, recovering from a sharp pandemic-induced slump, but began to lose steam in the summer, burdened by debt problems in the housing market and strict measures against the Covid-19 pandemic that have affected the economy. confidence and consumer spending.

Rising raw material costs and weak demand also eroded companies’ profit margins. Profits at industrial companies grew at their slowest pace in December in more than a year and a half.

With the real estate sector slumping, which is expected to drag on at least until the first half of this year, and the emergence of more infectious variants of Covid-19, the Central Bank of China has begun to cut interest rates and pump more money into the system. finance to reduce borrowing costs. Further modest easing measures are expected in the coming weeks.

Stability measures are expected to be the main theme of the once-every-five-year Communist Party congress set for this 2022, with policymakers looking to avoid a sharper slowdown that could hurt job creation.

Covid-19 effect

However, easing carries risks, as other global central banks such as the US Federal Reserve are preparing to raise interest rates, which could spur potentially destabilizing capital outflows from emerging markets such as China.

The International Monetary Fund (IMF) on Wednesday cut its 2022 growth forecast for China to 4.8% from 5.6% previously, reflecting real estate woes and the impact on consumption of Covid’s tight restrictions. -19.

“Industrial activity has slowed due to weak domestic demand,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management. “The service sector is also negatively affected by the outbreaks in many cities.”

“The weak PMI indicates that the government’s policy easing measures have not yet been passed on to the real economy. We expect the government to step up support for the policy in the coming months, primarily through more fiscal spending.”

A sub-index in the official PMI for production came in at 50.9, down from 51.4 in December, while new orders dropped to 49.3 from 49.7.

While new Covid-19 cases in China have been low compared to many other countries, a wave of infections since late December in the Xian manufacturing hub has forced many car and chip makers to shut down. Production gradually returned to normal as the city emerged from lockdown.

Production in Tianjin, which battled an outbreak of the highly transmissible Omicron variant, was also affected.

At the same time, the government is trying to limit levels of industrial air pollution ahead of the Beijing Winter Olympics, which start on Friday. China has told steelmakers in northern regions to cut production by mid-March.

A survey of China’s broad services sector also showed growth slowing in January as virus containment measures hit consumer sentiment.

China’s official composite PMI, which combined manufacturing and services, came in at 50.1 in January, compared with 52.2 in December. China’s economy grew 4.0% in the fourth quarter from a year earlier, its weakest expansion in a year and a half.