Industrial activity in China extends its decline due to the advance of COVID -Caixin PMI

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Chinese factory activity contracted at a sharper pace in December as rising COVID-19 infections disrupted production and weighed on demand after Beijing largely lifted coronavirus restrictions, a private-sector survey showed on Tuesday.

The Caixin/Markit manufacturing purchasing managers’ index (PMI) fell to 49.0 in December from 49.4 in November. The index has remained five consecutive months below the 50 points that separate growth from contraction.

The reading was the lowest since September but beat analysts’ forecast of 48.8 in a Reuters poll.

China’s most far-reaching official PMI survey on Saturday showed a much sharper decline, with the activity index falling to its lowest level in nearly three years. The Caixin survey focuses on smaller, export-oriented businesses.

The figures offer a snapshot of the challenges facing Chinese manufacturers, who now have to cope with a surge in infections following the sharp shift in the country’s COVID-19 policy in early December.

“Supply contracted, total demand remained weak, foreign demand contracted, employment deteriorated, logistics were sluggish, manufacturers faced increasing pressure on their profitability and the amount of purchases as well as inventories remained low,” said Wang Zhe, senior economist at Caixin Insight Group.

Weakening external demand amid slowing global growth continued to weigh on export-oriented producer orders, and the Caixin sub-index of new export orders contracted at the fastest pace since September.

Logistical woes lengthened supplier lead times for the sixth consecutive month, while manufacturing employment contracted for the ninth consecutive month due to low production levels and difficulties finding workers amid coronavirus outbreaks.

However, manufacturers were somewhat optimistic and the future production sub-index reached its highest level since February, following the lifting of COVID-19 restrictions.

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Some analysts expect that labor shortages and increasing supply chain disruptions, combined with lower customer demand, may lead to a further decline in production in the winter months, even if mobility restrictions are eased.

“With ‘zero contagion’ already in the rearview mirror, markets expect a dazzling recovery in 2023,” said Derek Scissors, chief economist at China’s Beige Book.

“That will be right, at some point. However, with the COVID tide ongoing, investment falling to 10-quarter lows and new orders still being hit, a significant recovery in Q1 is becoming less realistic.”

However, Sheana Yue, China economist at Capital Economics, says she doesn’t overly note the immediate significance of both official and Caixin PMIs, given their tendency to overstate the industrial shocks of some past outbreaks.

“Meanwhile, the upcoming holiday displacement will likely cause the virus to spread to more rural areas, further depressing the service sector,” Yue said, referring to the annual mass travel that takes place before and after the Lunar New Year holiday.

The December Caixin Services PMI will be released on Thursday.

Chinese leaders have vowed to step up regulatory adjustments to cushion the impact on businesses and consumers of rising COVID-19 infections at a time when a weakening global economy is hurting exports.

The world’s second-largest economy grew 3% in the first nine months of 2022 and is expected to remain around that rate throughout the year, one of its worst years in nearly half a century.

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