China’s factory activity shrank more than expected in December, an official survey showed, highlighting the economic toll from strict and prolonged COVID restrictions as well as a sluggish property sector.
The official manufacturing purchasing managers’ index (PMI) fell to 47.0 from 48.0 in November, the National Bureau of Statistics (NBS) said on Saturday. The result was well below the median forecast in a Reuters poll for 48.0.##
- The manufacturing PMI dropped to 47.0 in December from 48.0 in November, falling below the 50-point mark that separates contraction from growth.
- New orders and production declined further amid weakening domestic and foreign demand.
- Input prices dropped for the first time in nearly two years due to falling prices for some raw materials.
- Non-manufacturing PMI picked up to 52.7 from 46.7 in November, ending six straight months of decline.
“The official manufacturing PMI dropped 0.5 point from the previous month to 47 percent, indicating a deterioration in economic activity,” said Zhao Qinghe, senior statistician at the NBS.
“In December, affected by multiple unexpected factors including the international situation and domestic COVID-19 outbreaks, China’s purchasing activities declined, especially the manufacturing sector.”
Causes Behind the Slump
The latest outbreaks of COVID-19 infections have forced authorities across China to impose tough restrictions to contain the spread, hitting production at factories. Several analysts say they expect the weakening global economy to continue weighing on China’s export sector for some time.
Tu Xinquan, dean of the China Institute for WTO Studies at the University of International Business and Economics, said the contraction showed China’s economy was facing multiple challenges both externally and internally.
“Externally, the world economy is likely to enter a recession next year due to the U.S. Federal Reserve’s rate hikes and other central banks’ tightening policies to curb high inflation,” Tu said.
Domestically, Tu said the contraction in manufacturing activity highlighted the obstacles for the world’s second biggest economy to resume normality after the government abandoned its strict zero-COVID policy in early December.
“The manufacturing sector is facing multiple pressures, while domestic consumption, which has played a bigger part in driving economic growth, will need some time to recover,” Tu said.
China’s yuan currency finished the year sharply lower against the dollar as worries over the country’s growth outlook and zero-COVID reversals fueled foreign outflows. For 2023, some analysts expect Beijing’s debt crisis and virus policies to further undermine the economic fundamentals.
Ongoing Effects of Zero-COVID Policy
China only recently emerged from years of strict COVID restrictions under a zero-COVID policy. But surging infections threaten to cause further disruptions.
“Downside risks remain as the ‘bringing businesses back to work’ effect in the new year could fade out while people returning from the countryside will need some time to stand firmly in the job market,” said Wang Zhe, senior economist at Caixin Insight Group, in a note on Saturday.
“Insufficient domestic demand is still the key constraint. As fiscal expenditure is tightened and monetary tools stretch close to their limits, it’s difficult for China to introduce strong stimulus policies,” said Wang.
Calls for Increased Policy Support
The People’s Bank of China (PBOC) has pledged to step up policy support for the economy as the hit to growth from COVID is broadening, but analysts warn policymakers have limited room to stimulate the economy after widespread stimulus measures this year.
Chinese steel mills, car makers and consumer goods producers have felt the pinch from the country’s strict zero-COVID containment rules this year, including lockdowns, mobility limits on workers and consumers, and outright factory shutdowns.
Analysts say increased infrastructure spending appears to be the lowest hanging policy fruit after China announced 16 new transport infrastructure projects in November, underscoring hopes for robust public spending to buoy the recovery.
New bank lending also surpassed expectations in November thanks to the prodding from policymakers. Some analysts expect a further cut in banks’ reserve requirement ratios next year.
State media quoted policy advisers as saying on Thursday that China’s annual Central Economic Work Conference this month was expected to underline stability priorities for 2023 and unveil more pro-growth measures to revitalize pandemic-hit industries.
Outlook for Early 2023 Still Gloomy
Despite some improvements in domestic demand and the easing of virus curbs, which forced temporary business closures, analysts expect China’s economy to take time to bottom out from current lows.
China’s economic growth is forecast to slow to 3% in 2022, the weakest since 1976 if the official target for around 5.5% is not met. Growth is then expected to edge up to 4.9% in 2023 before steadying, a Reuters poll showed.
Policymakers have pledged to step up support for the real economy in 2023 to get economic growth back on a recovery path from the depths hit this year.
New bank lending in China rebounded more than expected in November from the previous month, buoyed by central bank policy support, but loan demand remained sluggish as business confidence stays fragile amid the government’s strict anti-COVID measures.
“The manufacturing PMI data points to a further loss of economic momentum this month as virus disruptions worsened and export orders remained under pressure,” said Zichun Huang, economist at Capital Economics, in a note.
In line with the downbeat data, Asian shares and U.S. stock futures slid further on Monday as investors looked ahead to more losses for the year after the major benchmarks finished their worst year since 2008 on lingering worries about higher U.S. rates and global recession risks.
So in summary, despite some recent easing measures, China faces major economic headwinds from the global slowdown, effects of years of zero-COVID, and weak domestic demand. Calls are growing for increased stimulus in 2023 to stabilize growth, but policymakers have limited room. The outlook remains gloomy, at least for the first part of the new year.
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