China factory and service sectors get rid of 3 months of closing pain

A worker polishes a steel rim of a bicycle at a sports equipment manufacturing plant in Hangzhou, Zhejiang Province, China, September 2, 2019. China Daily via Reuters

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  • China Factory, Services PMI above 50 for the first time since February
  • Recovery seen as partly easy COVID restrictions
  • The GDP growth target for 2022 is still seen as ambitious

Business surveys showed on Thursday that China’s factory and service sectors snapped three months of downturn in activity in June, as authorities lifted a strict coronavirus lockdown in Shanghai, reviving production and consumer spending.

The National Bureau of Statistics said the official manufacturing PMI rose to 50.2 in June from 49.6 in May.

That came in slightly different from expectations of 50.5 in a Reuters poll, but rose above the 50-point barrier that separates contraction from growth for the first time since February.

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While activity has accelerated since various coronavirus lockdowns eased since March, headwinds have persisted, including a still-weak real estate market, weak consumer spending and fear of any recurring waves of infections.

“Today’s NBS numbers were encouraging, even if manufacturing is a little disappointing and expectations are for improvement given the easing of lockdown restrictions,” said Matt Simpson, chief market analyst at City Index.

Investors welcomed signs of economic recovery as China’s major stock indexes rose more than 1% and braced for their biggest monthly rise in nearly two years.

The production sub-index held steady at 52.8, the highest level since March 2021, while new orders also returned to expansionary territory for the first time in four months, although growth remained weak.

“Although the manufacturing sector continued to recover this month, 49.3% of companies reported that orders were insufficient,” said Chu Hong, chief statistician at NBS. “Weak market demand remains the main problem facing the manufacturing industry.”

“Some companies faced pressure in their profit margins and relatively huge operating difficulties,” Zhou added.

The Shenzhen factory center was closed for a week in March, while Shanghai, in the heart of the Yangtze River Delta manufacturing region, was put under a strict lockdown for nearly two months before restrictions were lifted on June 1.

A survey by Amcham China on Thursday showed that supply chains received some relief in June, as fewer companies reported COVID disruptions, but 98% of companies in the survey were still experiencing a negative impact from COVID on their businesses.

Analysts expect further improvement in economic conditions in the third quarter, although the official GDP target of around 5.5% for this year will be difficult to achieve unless the government abandons its zero-COVID strategy.

“This increase in economic activities is likely to maintain the momentum until July, when there is a further easing in mobility restrictions,” said Zhang Chuiwei, chief economist at Pinpoint Asset Management.

“However, China sticks to its no-COVID policy position. I think that means that economic growth will likely remain below its potential before the policy is relaxed further.”

The government said this week that it would lower COVID-19 quarantine requirements for international travelers and removed the travel indicator across coronavirus-hit cities on a state-authorized mobile app for its citizens, paving the way for more exchanges of people and goods. Read more

However, President Xi Jinping on Tuesday defended the policy of non-proliferation of the coronavirus, saying that China is willing to accept some temporary impact on economic development at the expense of harm to people’s health. Read more

Back strong services

The official non-manufacturing PMI improved in June to 54.7 from 47.8 in May.

The service industry experienced an impressive recovery, the fastest in 13 months, with sectors hard hit by COVID restrictions, such as retail and road transportation, catching up with previously low demand.

However, social distancing rules such as those related to dining in restaurants were still in effect in Shanghai throughout the month of June.

The construction activity index also rose to 56.6 from 52.2.

In order to stabilize growth and curb unemployment, China’s State Council recently announced a wide range of economic support measures and Premier Li Keqiang pledged reasonable economic growth in the second quarter.

China’s official composite PMI, which includes both manufacturing and services activity, came in at 54.1, compared to 48.4 in May.

However, some analysts are skeptical that the momentum can continue in the medium to long term.

“PMI employment indicators continue to point to weakness in the labor market, suggesting that household finance and consumer confidence remain fragile,” said Julian Evans-Pritchard, chief China economist at Capital Economics.

“Once the push for reopening wears off, that will affect any further recovery. Compared to 2020, the economy will benefit from fewer tailwinds from export demand and policy stimulus.”

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(Reporting by Stella Keogh, Elaine Zhang, Ella Cao and Ryan Wu; Editing by Sam Holmes

Our Standards: Thomson Reuters Trust Principles.

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