BEIJING (Reuters – China’s factory activities contracted faster in April because of widespread COVID-19 locks that halted industrial production. They also disrupted supply chains. There are fears about a global economic slowdown.

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.

According to Reuters, the PMI was expected to fall to 48 in a poll. This is well below the 50 point mark which separates growth and contraction on a monthly basis.

Combining a sharper cut in services with the headline PMI reading gave first clues to the economy’s performance after it was ravaged from increasing COVID curbs like the extended shut down of Shanghai, the main commercial hub.

Caixin surveys private industry and found that factory activity declined at its fastest rate in 26 months. New export orders index fell to its lowest point since June 2020. It suggests that the economy is losing one bright spot.

According to statistics bureau, COVID disruptions are associated with significant drops in supply and demand in the manufacturing industry.

NBS reported that “Some companies have difficulties in key raw material, component supplies, final products sales, and rising inventories”. The NBS believes matters will improve with the pandemic under control, the adoption of supportive policies, and other factors.

A strict COVID policy is believed to have led to the lockdown of dozens upon dozens of Chinese capital cities.

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.

RISING RISK FOR RECESSION

Tesla, the electric car manufacturer (NASDAQ:), has reported a temporary decrease in production after China announced last week that shutdowns at Shanghai’s factory had cost it about a month.

Many analysts warn of increasing recession risk and say policymakers need to provide more stimuli in order for them reach the 5.5% official growth target by 2022.

Analysts say that growth is also being affected by COVID curbs, heightened risks from Ukraine War and persistently low consumption.

In a year that is politically delicate, authorities have offered more assistance to boost confidence and prevent further job loss.

China will increase policy support according to the Politburo (a high-ranking decision-making body within the ruling Communist Party), cheering battered stock market conditions.

Analysts warn that their task is more difficult if China changes its zero COVID policy which has been a slow process.

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 warn that conventional policy tools like interest rate cuts or larger liquidity injections could have limited effect if they paralyse activity.

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 its 4 trillion Yuan ($605.82billion) spending during the 2008/2009 financial crisis. This was a massive debt-creating programme that created an avalanche.

A sudden U-turn towards more aggressive easing might also increase capital outflows. This could cause policymakers headaches.

In 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. [CNY/]

China’s gross domestic products (GDP) increased 4.8% from the previous year, surpassing analysts’ expectations for an increase of 4.4%. But, the March data was weaker than expected. There were contractions in retail sales and the highest rate of unemployment since May 2020.

The sub-index for construction activity was 52.7 in April. This is a crucial economic driver Beijing hopes will boost growth in the coming year. It had been 58.1 in March.

Construction equipment maker Caterpillar Inc (NYSE) announced Thursday that China’s demand for excavators could fall below its pre-pandemic level in 2022. Company sales have been affected by lockdowns, such as General Electric Co and 3M Co.

According to one banker from a Chinese top-ten bank, she saw the biggest impact in small and medium-sized companies.

“The smaller borrowers are especially in the manufacturing sector, and they’re really hurting this time around because they don’t have enough cash reserves,” she stated.