China factory activity contracts again, but at slower pace

BEIJING • China's factory activity fell at a slower pace last month as Covid-19 curbs in major manufacturing hubs eased, but movement controls continued to weigh on demand and production, raising concerns about economic growth in the second quarter.

The official manufacturing purchasing managers' index rose to 49.6 from 47.4 in April, according to data released by the National Bureau of Statistics yesterday. That compares with the median estimate of 49 in a Bloomberg survey of economists.

The non-manufacturing gauge, which measures activity in the construction and service sectors, increased to 47.8 from April's 41.9, above the consensus forecast of 45.5.

A reading above 50 indicates expansion, while anything below indicates a contraction.

While the PMI hit a three-month high, it remained below the 50-point mark that separates contraction from growth for the third straight month.

"It shows the impact of Covid-19 outbreaks in May have not fully ended, leaving the economic outlook grim since the second quarter in 2020," said Mr Pang Ming, chief economist at Huaxing Securities.

The outlook for China's economy has darkened this year amid widespread Covid-19 outbreaks and stringent controls to curb infections. Economic activity collapsed in April, with retail sales and industrial output shrinking and the jobless rate soaring. Economists now predict growth will weaken to 4.5 per cent this year, well below the government's target of around 5.5 per cent.

While the lockdown of Shanghai that spurred a lot of the disruption has begun to ease, allowing some activities such as port operations to recover, the effects of the restrictions on production and supply chains will still likely be felt for months as businesses struggle to restart.

A set of early indicators measuring business confidence, declines in home and car sales and other metrics suggested China's economy remained deep in a slump last month. Small business confidence, for example, dropped to the worst level since the early months of the pandemic.

Even if China manages to right its supply chains quickly, any sustained recovery is still challenged by a lack of demand. The threat of a cycle of Covid-19 lockdowns should there be more outbreaks has weighed on business confidence, making them more cautious about expanding.

Consumers are also likely to save up rather than spend, if they are uncertain about the future.

Beijing has tried to support growth through a variety of measures and recently rolled out a broad support package that covered everything from consumption and investment to tax cuts and loan support.

Premier Li Keqiang has also repeatedly called for local governments to do more to stabilise growth, warning of dire consequences if they do not move decisively.

BLOOMBERG