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May 19, 2024

China’s Manufacturing Sector Contracts Further Amid COVID Resurgence

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Jan 1, 2024

China’s manufacturing sector contracted for the third straight month in December, highlighting continued challenges in the world’s second-largest economy. The official manufacturing Purchasing Managers’ Index (PMI) fell to 47.0 in December from 48.0 in November, according to data from the National Bureau of Statistics (NBS).

Key Details

The December PMI reading was below market expectations of 48.0 and marked the lowest level since early 2020 when the COVID-19 pandemic first impacted China’s economy. A PMI reading below 50 indicates contraction while a reading above 50 signals expansion.

Some key details on China’s manufacturing sector performance in December:

  • Output sub-index fell to 44.2 from 45.3 in November
  • New orders sub-index dropped to 43.6 from 46.4
  • New export orders sub-index declined to 46.9 from 48.0
  • Employment sub-index weakened to 48.0 from 48.7

Factors Behind The Decline

The further decline in manufacturing activity has been attributed to several factors:

Resurgent COVID-19 Cases

A surge in COVID-19 cases as China relaxed its stringent zero-COVID policy led to rising infections, disrupting production and demand. Many workers fell ill or were quarantined due to close-contact tracing. This resulted in severe labor shortages and logistics bottlenecks.

Sluggish Domestic, Foreign Demand

With the COVID wave impacting consumers and economic uncertainty persisting both at home and abroad, demand has remained weak. New orders and new export orders fell sharply in December.

Property Market Slump

China’s property sector has been in a protracted slump amid a liquidity crisis for developers. With home sales and construction activity falling, this has hit demand for raw materials and weighed heavily on the manufacturing sector.

Table 1: China Manufacturing PMI Change (Nov 2022 - Dec 2022)

Category            Nov 2022   Dec 2022    Change
Overall PMI          48.0        47.0        -1.0  
New Orders          46.4        43.6        -2.8
New Export Orders   48.0        46.9        -1.1
Employment          48.7        48.0        -0.7

Impact and Outlook

The worsening manufacturing contraction shows headwinds for China’s economy as it reopens. However, some analysts expect the decline to be bottoming out.

Government policy support through accelerated infrastructure spending and liquidity injection could stabilize the sector over the next few months. The People’s Bank of China also cut interest rates in December to boost credit and economic growth.

If COVID disruptions continue to ease and policy stimulus effects kick in, manufacturing activity may start to recover from Q2 2023. But a sharp rebound looks unlikely given the muted outlook for domestic and global demand.

Table 2: China Manufacturing PMI Forecasts for Q1 2023 

Firm               Forecast  
Capital Economics    48.5
ANZ                   49.0     
Standard Chartered    49.5

Global Growth Implications

As a manufacturing powerhouse, China’s slowing industry activity doesn’t bode well for global supply chains and trade already facing economic strains.

With China accounting for over 28% of global manufacturing output, many countries remain dependent on Chinese intermediate exports used in finished products. Prolonged manufacturing weakness could exacerbate shortages and inflate prices internationally.

Moreover, subdued demand from China, which constitutes nearly 20% of global GDP, will further dampen world economic growth prospects at a time when major economies like the US and Europe face a likely recession.

Conclusion

In summary, China’s manufacturing downturn extended into December, underscoring how COVID disruptions and weak demand continue frustrating economic recovery. Targeted support policies may stabilize conditions next year, but any sharp rebound looks unlikely.

With manufacturing so vital to China’s economy, prolonged weakness would hamper domestic job markets and heighten global economic headwinds. Policymakers face pressure to walk the tightrope between stimulating growth and contending with debt risks.

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AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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