China’s zero-Covid policy remains ‘main constraint’ to economy as manufacturing, services wobble

  • Official manufacturing purchasing managers’ index (PMI) rose to 49.4 in August, while the non-manufacturing gauge fell to 52.6 from 53.8 in July
  • Power shortages caused by record heatwaves have largely subsided, but new coronavirus outbreaks are set to weigh on both manufacturing and services sectors

China’s manufacturing and service sectors are set to remain under pressure in September from coronavirus outbreaks after combining with heatwave-induced power shortages and a struggling property sector to weigh on activity in August, according to analysts.

The official manufacturing purchasing managers’ index (PMI) beat expectations but remained in contraction for a second consecutive month in August after rising to 49.4, up from 49 in July, the National Bureau of Statistics (NBS) said on Wednesday.

The official non-manufacturing PMI, which measures business sentiment in the services and construction sectors, also beat expectations but still fell to 52.6 from 53.8 in July.

“The soft reading is not so surprising, as the Chinese economy was under multiple headwinds in August,” said Larry Hu, chief China economist at Macquarie Group.

“Some of the headwinds have gone. Power rationing has eased as the weather is turning cooler and the rain finally came in Sichuan. More importantly, policymakers have rolled out a new round of policy easing with a focus on property, since they returned to the public eye in mid-August.

“They also announced that the widely anticipated 20th Party Congress will begin on October 16, implying that political uncertainties have largely been removed.”

New waves of the Omicron coronavirus variant have been found in several large cities in China, with the tech hub of Shenzhen imposing partial lockdowns, while the likes of Chengdu, Shijiazhuang and Tianjin have stepped up control measures.

Chengdu is the capital of Sichuan province, which found itself at the centre of the recent power shortage that shut down some industrial production to protect residential power supplies. Neighbouring Chongqing was also effected, with some construction work also suspended due to the heat.

“Economic activities stayed weak in August, partly due to the power shortage caused by heatwaves. As the weather cools down, economic activities may improve modestly in the next few months, but the main constraint for the economy has not be removed,” said Zhang Zhiwei, president and chief economist at Pinpoint Asset Management.

“We expect the zero-Covid policy to be revised after the [national congress] meeting in October, which will help the economy normalise.”

The strict coronavirus controls, downward pressure on the housing sector and power shortages in Sichuan have been weighing on the overall slowing economy, with growth forecasts for China this year slashed by Standard Chartered, Goldman Sachs and Natixis earlier this month.

“Looking to September, although the heatwave will likely subside as summer concludes, the recent spread of Omicron to large cities – from Chengdu in the West to Shenzhen in the south to Shijiazhuang and Tianjin in the north [very close to Beijing] – may weigh on business activity in both manufacturing and services sectors,” said Nomura economists, led by Lu Ting.

They expect China’s manufacturing PMI to remain weak at around 49.5 in September, with the non-manufacturing gauge falling to 49.5.

Within the official manufacturing PMI, the new orders subindex rose to 49.2 in August from 48.5 in July, while the new export orders subindex rose to 48.1 from 47.4. The production subindex remained unchanged at 49.8.

Within the official non-manufacturing PMI, the construction subindex fell to 56.5 in August from 59.2 in July, while the service subindex fell from 52.8 to 51.9.

The official composite PMI, which includes both manufacturing and services activity, fell to 51.7 in August, down from 52.5 in July.

“The official PMIs show a further loss in economic momentum this month as the reopening boost waned and the property downturn deepened. We continue to think the economy will struggle to make much headway during the coming months,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

“The disruptions from the power shortages are now receding. State media reported [on Tuesday] that the power supply to industrial users in Sichuan and Chongqing has been restored. But the coronavirus situation is worsening again.

“For now, the resulting disruptions appear modest, but the threat of damaging lockdowns is growing. And even if they are avoided, we expect growth to remain subdued going forward. Problems in the property construction are likely to persist, and the current strength of exports won’t be sustained as the global economy cools.”

Authors: Andrew Mullen, Mia Nulimaimaiti, SCMP

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