Chinese factory activity unexpectedly contracts in July as COVID flares up

Employees work on the vehicle component production line during a government-organized media tour at a factory of German engineering group Voith, following the coronavirus disease (COVID-19) outbreak, in Shanghai, China July 21, 2022. REUTERS/Aly Song

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  • China July official manufacturing PMI lower than expected
  • July official services PMI rises at a slower pace
  • COVID outbreaks, cooling global demand, major real estate risks
  • Big stimulus unlikely, government fails to mention growth target

BEIJING, July 31 (Reuters) – Chinese factory activity unexpectedly contracted in July after rebounding from COVID-19 lockdowns the month before, as new virus outbreaks and a darkening global outlook were weighing on demand, according to a survey released on Sunday.

The official Purchasing Managers’ Index (PMI) for the manufacturing sector fell to 49.0 in July from 50.2 in June, the National Bureau of Statistics (NBS) said, below the 50-point mark that separates the contraction in growth and the lowest in three months.

Analysts polled by Reuters had expected a reading of 50.4.

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“The level of economic prosperity in China has fallen, the foundations for recovery still need to be consolidated,” NBS senior statistician Zhao Qinghe said in a statement posted on the NBS website.

The continued contraction in energy-intensive industries, such as gasoline, coking coal and ferrous metals, contributed the most to lowering July’s manufacturing PMI, he said.

The production and new orders sub-indexes fell 3 points and about 2 points respectively in July, while the employment sub-index edged down 0.1 points.

Weak demand has limited the recovery, Bruce Pang, chief economist and head of research at Jones Lang Lasalle Inc, said in a research note. “Growth in the third quarter may face greater challenges than expected as the recovery is slow and fragile,” he added.

The official non-manufacturing PMI in July fell to 53.8 from 54.7 in June. The official composite PMI, which includes manufacturing and services, fell to 52.5 from 54.1.

China’s economy barely grew in the second quarter amid widespread lockdowns, and top leaders recently signaled that their strict zero COVID policy will remain a top priority. Read more

Policymakers are poised to miss their GDP growth target of “about 5.5%” for this year, state media reported after a high-level meeting of the ruling Communist Party. Read more

Beijing’s decision to no longer mention the target has stifled speculation that authorities will roll out massive stimulus, as they have often done in previous recessions.

Capital Economics says political moderation, along with the constant threat of further shutdowns and low consumer confidence, are likely to make China’s economic recovery take longer.

LOW RECOVERY

After a rebound in June, the recovery of the world’s second-largest economy has faltered as COVID surges have led to tighter brakes on activity in some cities, while the once-mighty property market wobbles from crisis to crisis.

Chinese manufacturers continue to struggle with high commodity prices, which squeeze profit margins, as export prospects remain clouded by fears of a global recession.

The megacity of Shenzhen in southern China pledged to “mobilize all resources” to curb a slow spread of the COVID epidemic, ordering strict implementation of testing and temperature checks, and closures for buildings affected by COVID. Read more

The port city of Tianjin, home to factories linked to Boeing (BA.N) and Volkswagen, and other areas tightened restrictions this month to fight new outbreaks. Read more

According to World Economics, containment measures had some impact on 41% of Chinese businesses in July, although its manufacturing business confidence index rose significantly from 50.2 in June to 51.7 in July.

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Report from the Beijing Newsroom; Editing by William Mallard and Himani Sarkar

Our standards: The Thomson Reuters Trust Principles.

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