Production in China is shrinking sharply as Covid infections rise

Factory activity in China contracted for a third straight month in December and at its fastest rate in nearly three years as Covid infections swept through production lines across the country following Beijing’s abrupt reversal of anti-virus measures.

The official purchasing managers index (PMI) fell from 48.0 in November to 47.0, the National Bureau of Statistics (NBS) reported on Saturday. Economists had expected the PMI to come in at 48.0 in a Reuters poll. The 50-point barrier separates contraction from growth on a monthly basis.

The drop was the largest since the early days of the pandemic in February 2020.

The data provided the first official snapshot of the manufacturing sector after China lifted the world’s strictest Covid restrictions in early December. The cumulative number of infections likely reached 18.6 million in December, UK-based health data company Airfinity estimated.

Analysts said rising infections could lead to temporary labor shortages and more supply chain disruptions. This was reported by Reuters news agency on Wednesday Tesla plans to implement a shortened production schedule at its Shanghai factory in January, extending reduced production that began this month into next year.

Declining foreign demand amid growing fears of a global recession amid rising interest rates, inflation and the war in Ukraine could further slow Chinese exports, hurt its huge manufacturing sector and hinder an economic recovery.

“Most factories I know are well below where they could be at this time of year for orders next year. Many factories I have spoken to are at 50%, some below 20%,” says Cameron Johnson, a partner at Tidalwave Solutions, a supply chain consulting firm.

“So even though China is opening up, production will still slow down as the rest of the global economy slows down. Factories will have workers, but they won’t have orders.”

NBS said 56.3% of manufacturers surveyed said they were strongly affected by the epidemic in December, up 15.5 percentage points from the previous month, though most also said they expect the situation to gradually improve.

“While (the factory PMI) was lower than expected, it’s actually difficult for analysts to make a reasonable forecast given the virus uncertainties over the past month,” said Zhou Hao, chief economist at brokerage firm Guotai Junan International.

“Overall, we believe the worst for China’s economy is over and a strong economic recovery is ahead.”

The country’s banking and insurance regulator pledged this week to ramp up financial support to small and private businesses in the hospitality and tourism sectors that were hit hard by the Covid-19 epidemic, highlighting that a recovery in consumption is a will be priority.

The non-manufacturing PMI, which looks at activity in the services sector, fell to 41.6 from 46.7 in November, the NBS data showed, also the lowest reading since February 2020.

The official composite PMI, which combines manufacturing and services, fell from 47.1 to 42.6.

“The weeks leading up to Chinese New Year will continue to be a challenge for the services sector as people don’t want to go out and spend more than they need to for fear of contracting an infection,” said Mark Williams, Chief Asia Economist at Capital Economics.

“But the outlook should improve around the time people return from the Chinese New Year holiday – infections will have subsided and a large proportion of people will have had Covid recently and feel they have some degree of immunity.”