China manufacturing activity slows for first time since April 2020

Chinese economy updates

One of China’s most important gauges of manufacturing activity has contracted for the first time since the early stages of the coronavirus pandemic, bolstering expectations that Beijing will step up measures to support the economy.

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The Caixin manufacturing purchasing managers’ index, an independent survey of factory activity, came in at 49.2 in August, dropping below the 50-mark that separates monthly expansion from contraction for the first time since April 2020.

The data was released a day after official PMI manufacturing data stopped just short of contraction but at 50.1, posted its weakest reading since February last year. Its measure of the services sector plunged into negative territory as a recent outbreak of Covid-19 weighed on activity.

The indices are one of the clearest signs yet of a loss of momentum across China’s economy, which outperformed other big economies last year on the back of an industry-fuelled recovery. But China is now grappling with weaker export demand, high prices of raw materials and a slowing property sector.

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Several analysts have recently cut their growth forecasts and anticipate further government action after the People’s Bank of China cut its reserve requirement ratio for banks in July, which injected liquidity into the financial system. David Chao, global markets strategist at Invesco, said the PMI data “could be an ominous sign for the upcoming monthly economic data”.

“To buffer against a deteriorating macro backdrop, we think that policymakers could ramp up monetary and fiscal stimulus,” he said.

An outbreak of the Delta variant of coronavirus, which led to strict restrictions on travel, has hit activity in a service sector that had already lagged behind the broader recovery as households remained cautious.

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Zhiwei Zhang, chief economist at Pinpoint Asset Management, said the decline in official services PMI could be attributed to the outbreak but the manufacturing weakness “likely indicates more persistent pressure the economy faces, as the property cycle cools down”.

China’s property sector is a crucial engine of overall economic activity and construction soared last year but big developers have come under pressure from Beijing to reduce their debt levels. A rate cut last year stoked worries of an asset bubble in the real estate sector, where local authorities have also moved to control prices. 

“Ongoing monetary and fiscal easing measures appear insufficient to reverse the growth downtrend, as the drag from a cooling property sector is too strong to be fully offset,” said Ting Lu, chief economist at Nomura, at an investor forum this week.

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In July, in a sign of the policies taking effect, new home prices rose at their slowest pace in six months, with average prices across 70 cities adding 0.3 per cent month-on-month, according to Reuters calculations based on data from the National Bureau of Statistics.

Additional reporting by Sherry Fei Ju in Beijing

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