China manufacturing shrinks unexpectedly, services offer support
Chinas manufacturing activity unexpectedly slimmed in September due to limitations
(Reuters) – China’s manufacturing activity unexpectedly slimmed in September due to limitations on electricity use and high input prices, while services expanded again as COVID-19 outbreaks subsided, delivering some relief to the world’s second-largest economy.
The official manufacturing purchasing managers index (PMI) stood at 49.6 in September versus 50.1 in August, data from the National Bureau of Statistics (NBS) showed on Thursday, falling in contraction for the first time since February 2020.
Analysts in a Reuters poll expected the index to hold steady at 50.1, unchanged from the previous month. The 50 point mark separates growth from contraction.
China’s economy quickly recovered from a pandemic-induced slump last year, but momentum has weakened in recent months, with its burgeoning manufacturing sector hit by rising costs, production bottlenecks and the rationing of electricity.
The surge in COVID-19 cases in dozens of cities over the summer also disrupted the manufacturing and service sectors, although the latter is beginning to rebound as the outbreaks receded.
An industrial production sub-index contracted in September for the first time since February last year, dragged down by a setback in energy-intensive industries such as plants that process metals and petroleum products. The indicator stood at 49.6 compared to 50.1 the previous month.
“In September, due to factors such as low business volumes in energy-intensive industries, the manufacturing PMI fell below the critical point,” said Zhao Qinghe, senior statistician at NBS, in an accompanying statement.
“The two indices for energy-intensive industries are below 45.0, indicating a significant drop in supply and demand.”
GROWTH PROSPECTS
The sudden contraction in manufacturing activity will further affect an economy that has already been hit by restrictions in its property and technology sectors and that faces many growth downs from private sector economists.
Other Asian economies are also grappling with production problems due to supply chain disruptions, with data on Thursday showing that Japan’s industrial production fell for the second month in a row in August.
“(Chinese) economic growth in the fourth quarter is likely to slow further without a change in government policies, and the pace of the slowdown could accelerate,” said Zhiwei Zhang, chief economist at Shenzhen-based Pinpoint Asset Management, after that the PMI data will be published.
“The big question is whether the government’s monetary and fiscal policies will be more favorable now or whether the government will wait until the end of the year to change policies.”
The central bank last relaxed its requirements on how much cash banks should have in mid-July, just before a surge in domestic COVID-19 cases.
The People’s Bank of China (PBOC) has left its benchmark interest rate for corporate and domestic loans unchanged for the seventeenth month of September.
HIGH PRODUCTION COSTS
Coal shortages, strict emissions standards, and strong demand from manufacturers and industry pushed coal prices to record highs and led to widespread restrictions on electricity use in at least 20 provinces and regions.
Higher prices for raw materials, especially metals and semiconductors, have also put pressure on manufacturers’ earnings. China’s industrial companies’ earnings in August slowed for the sixth month in a row.
A sub-index for raw material costs rose to 63.5 in September from 61.3 a month earlier, while a new orders indicator came in at 49.3 compared to 49.6 in August, contracting for the second month in a row.
An employment sub-index remained in contraction, at 47.8 compared to 47.0 a month earlier.
A separate private survey also released Thursday that focuses on export-oriented small businesses showed that factory activity in September neither expanded nor contracted.
On a more optimistic note, the official non-manufacturing PMI for September stood at 53.2, recovering from 47.5 in August, NBS data showed, as the COVID-19 outbreaks receded after rising during the summer months.
Last month, restrictions related to COVID-19 pushed service sector activity into a sharp contraction for the first time since the height of the pandemic last year.
The official composite PMI for September, which includes both manufacturing and services activity, stood at 51.7 compared to 48.9 in August. (Reporting by Ryan Woo and Gabriel Crossley; Edited by Tom Hogue and Ana Nicolaci da Costa)
