The Perfect Enemy | China Economy Weakens as Covid Hits Factory, Services Output

(Bloomberg) — China’s factory and services activity contracted in October as tighter Covid curbs and an ongoing slump in the property market continue to pressure the world’s second-largest economy.

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The official manufacturing purchasing managers index fell to 49.2 this month from 50.1 in September, according to a statement from the National Bureau of Statistics on Monday. That was below an estimate of 49.8 in a Bloomberg survey of economists.

The non-manufacturing index, which measures activity in the construction and services sectors, fell to 48.7 from 50.6, lower than the forecast of 50.1. A reading below 50 indicates contraction in activity, while anything above suggests expansion.

“Today’s data suggest it is too early to bet on China’s economic recovery” despite recent third-quarter economic data performing better than expected, said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. “Rising Covid, lackluster property and falling exports are dragging China’s growth momentum.”

The drop in the PMI in October was due to sporadic outbreaks, NBS analyst Zhao Qinghe said in a statement, adding that “there is a need for a further steadying of foundations for a recovery.”

China’s 10-year government bond yield extended its decline after the data was released, falling 3 basis points at 2.64%, the lowest level since Sept. 9. The yuan slid 0.3% to 7.2852 per dollar in offshore trading.

What Bloomberg Economics Says…

“As grim as China’s October PMIs are, the broad tumble into contraction probably doesn’t capture all the weakness in the economy. The slides in the manufacturing and non-manufacturing PMIs below 50 were steeper than expected. What’s more, the survey wrapped up on Oct. 25 — before fresh Covid curbs were applied to contain more outbreaks. The message is clear — growth is turning down again.”

— David Qu and Chang Shu, economists

For the full report, click here

While the government’s infrastructure push has boosted production of construction materials like steel, providing some lift to manufacturing, the recovery is still being held back by strict Covid controls and the property market slump. Data last week showed economic growth strengthened to 3.9% in the third quarter, though retail sales weakened in September and unemployment rose.

“The key takeaway here is that you can do more infrastructure and manufacturing investment, but it also depends on how much of a hole you have to fill in between the property slowdown and the Covid impact,” Hui Shan, chief China economist at Goldman Sachs Group Inc., said in an interview with Bloomberg TV.

Virus curbs were heightened in some areas last month ahead of the twice-a-decade party congress, in which President Xi Jinping secured an unprecedented third term in power. Though no major cities were in lockdown, restrictions to movement were in place in several places, hitting tourism revenue during the week-long national holiday at the beginning of October.

Other key highlights of the PMI report:

The sub-index measuring new orders for manufacturing fell to 48.1 in October from 49.8 in September, while new export orders slumped to 47.6
A sub-gauge measuring suppliers’ delivery times declined to 47.1 from 48.7
The input prices index for manufacturers increased to 53.3, suggesting higher costs for businesses, while output prices was rose to 48.7
Job losses likely mounted, with the manufacturing employment sub-index dropping to 48.3 and the non-manufacturing employment index sliding to 46.1
Activity at large enterprises showed little improvement at 50.1, while conditions at small firms worsened slightly to 48.2

–With assistance from James Mayger.

(Updates with additional sub-indexes, economist comments.)