The activity of Chinese factories continues its decline due to the heat and COVID

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Chinese factory activity extended its decline in August as new COVID infections, the worst heat waves in decades and real estate problems weighed on output, suggesting the economy will struggle to maintain momentum.

The official purchasing managers’ index (PMI) for the manufacturing sector rose to 49.4 points in August, up from 49.0 in July, China’s National Bureau of Statistics said on Wednesday.

Although the PMI slightly beat expectations of 49.2 forecast by a Reuters poll of analysts, it remained below the 50-point mark that separates contraction from growth for the second month in a row, suggesting prolonged weakness in the sector.

The survey shows that the world’s second-largest economy is finding it difficult to get out of the sluggish growth recorded in the April-June quarter, and the outlook is clouded by various risks, as high inflation and Ukraine’s war are hurting external demand.

“Official PMIs show a further loss of economic momentum this month, as the momentum from reopening slows and the housing slump deepens,” Julian Evans-Pritchard, China economist at Capital Economics, said in a note. “We continue to think the economy will struggle to make a lot of progress over the coming months.”

Raymond Yeung, chief economist for Greater China at ANZ, cut his gross domestic product forecast for 2022 from 4.0% to 3.0% in the face of weakening demand.

It also expects activity to be disrupted by tightening virus controls ahead of October’s Communist Party of China Congress.

The production sub-index remained unchanged, but remains in contractionary territory, as production is disrupted by energy shortages, while the new orders sub-index grew 0.7 points.

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In particular, small manufacturers, which are less equipped to mitigate COVID disruptions than their larger competitors, suffered increased pressure in August, with their PMI down 0.3 points.

According to analysts, the return of COVID-19 restrictions in August, as new cases are recorded, suggests that Beijing has no immediate plans to ease its “zero COVID” policy.

According to Evans-Pritchard, 41 cities representing 32% of China’s GDP are currently suffering from outbreaks, the highest figure since April, when extensive lockdowns severely hit the economy.

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