China factory activity contracts in April at steeper pace as lockdowns bite
Workers at the factory producing carbon fiber badminton rackets in Sihong County. China said Saturday that factories activity declined at an even faster pace in April after Covid-19 lockdowns disrupted industrial production.
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China’s factories contracted faster in April than expected. Covid-19 lockdowns, which halted industrial production in China and disrupted supply chain connections, raised concerns about a severe economic slowdown that could impact global growth.
Official manufacturing Purchasing Managers’ Index (PMI), dropped to 49.5 from March’s 49.5, according to Saturday’s National Bureau of Statistics (NBS). It was the lowest reading since February 2020.
A Reuters poll predicted that the PMI would fall to 48. That’s well below 50 points, which is what separates growth from contraction.
A sharper cut in services combined with the headline PMI reading provided the first signs of an economy that is being devastated by Covid curbs like the extended shut down of Shanghai, the main commercial hub.
Caixin’s survey of private businesses showed that factory activity fell at the fastest pace in 26-months. The new index of export orders dropped to the lowest level since June 2020. This suggests a decline in one of the brightest spots of the economy.
The statistics bureau stated that Covid disruptions were associated with a significant decrease in demand and supply within the manufacturing sector.
The NBS stated that some companies are facing difficulties with key raw materials and component supply, sales of finished products, and increasing inventories. However, matters were improving as the pandemic was under control and support policies adopted.
Due to the strict Covid policy, it is believed that many major Chinese cities have been placed in partial or full lockdown.
Constantly stranded at home by hundreds of millions, consumer spending is suffering. This has prompted more analysts to reduce growth projections for the second-largest country in the world.
According to NBS, the production sub-index fell to 44.4 from 49.5 in April. New orders dropped to 42.6 in March from 48.8 in March.
Increased risk of recession
Make your own electric car TeslaChina’s curbs have led to a temporary decline in production after the factory said that it had lost about a month’s worth of capacity at Shanghai.
Analysts are warning about rising risks of recession and recommending that policymakers provide additional stimulus in order to achieve the official growth goal of 5.5% by 2022.
Analysts say that growth is also being affected by Covid curbs, heightened risks from Ukraine War and persistently low consumption.
The authorities promised to provide more support for confidence building and to prevent job losses during a political sensitive year.
China will provide more policy support to its citizens, according the Politburo of the ruling Communist Party, which is a key decision-making body. This gives some hope for battered stocks markets.
Analysts warn that their task is more difficult if China relaxes its zero-Covid policy. This China has not shown any signs of changing.
Zhiwei Zhang (Pinpoint Asset Management president and chief economist) stated that while these messages may be positive, it is all about specific policies and how they are implemented.
Analysts also believe that traditional tools such as interest rate reductions and large liquidity injections may not have the same impact if activity is paralyzed by lockdowns.
Because they do not have sufficient cash, smaller borrowers in manufacturing and other industries are especially vulnerable.
A top Chinese banker is a banker
This week, President Xi Jinping presided over a meeting with top leaders. He announced a major infrastructure push to increase demand. It reinforced Beijing’s preference to invest in big-ticket projects that will spur economic growth.
These projects are time-consuming and Beijing seems wary of another large stimulus program, like the 4 trillion Yuan ($605.82 Billion) it spent during 2008 and 2009 global financial crises that led to a mountainous amount of debt.
A sudden U-turn towards more aggressive easing might also increase capital outflows. This could cause policymakers headaches.
China’s yuanIn April, currency dropped more than 4%, marking its largest monthly fall in 28 years. Meanwhile, stock markets are the worst-performing this year, coming in second after Russia sanctions.
China’s Gross Domestic Product (GDP), grew by 4.8% from the previous year, exceeding analysts’ expectations of a gain of 4.4%. However, March data showed a sharp decline, with contraction in retail sales, and the highest unemployment rate since May 2020.
Beijing had hoped that the sub-index of building activity would boost economic growth, and it was at 52.7 this April.
Construction equipment maker Caterpillar IncOn Thursday, China’s largest market, China, warned that the demand for excavators could fall below its pre-pandemic level in 2022. Companies such as General Electric 3M.
According to one banker from a Chinese top-ten bank, she saw the biggest impact in small and medium-sized companies.
She stated that the “smaller borrowers,” especially in manufacturing, were really hurt this time because they didn’t have enough cash reserves.