China factory activity sees shock contraction on Covid-19 outbreaks

China’s factory activity unexpectedly contracted in July, reversing earlier economic momentum as sporadic Covid outbreaks weigh on the recovery. 

The official manufacturing purchasing managers index fell to 49 from 50.2 in June, the National Bureau of Statistics said Sunday. Economists had expected a reading of 50.3, according to the median estimate in a Bloomberg survey of economists. 

A reading above 50 indicates expansion from the previous month, while anything below indicates contraction.

The non-manufacturing gauge, which measures activity in the construction and services sectors, decreased to 53.8 from 54.7 the previous month. That was below the consensus forecast of 53.9. 

China’s economic recovery has been fragile as the government relaxes curbs with easing outbreaks, but then tightens them again wherever the virus pops back up. A flareup in the southern manufacturing hub of Shenzhen impacted factory operations there, raising concerns about disruptions to global supply chains.

What Bloomberg Economics Says...

China’s recovery is sputtering after only a short spurt in the wake of Shanghai’s reopening. A surprise drop in July’s official manufacturing PMI into contraction more than reversed June’s rise -- underlining an abrupt loss of momentum. Scattered Covid-19 outbreaks and fresh strains in the property sector are clearly taking a toll on the economy.

The data were grim across the board. The pullback in manufacturing was driven by weakening supply and demand (external and domestic) as well as deteriorating sentiment. The service sector -- which has more ground to recoup in the recovery -- saw its rebound lose steam, despite a policy boost that bolstered construction activity.

China’s economy in the second quarter grew at the slowest pace since the initial Wuhan outbreak, and economists expect full-year growth could reach just 4% or below as Covid outbreaks and restrictions, and an ongoing slump in the property market, continue to weigh on activity.

“The manufacturing purchasing managers index being under 50 shows China’s economic recovery is unstable yet,” Bruce Pang, chief economist at Jones Lang LaSalle Inc., said Sunday. “The challenges to China’s GDP growth in the third quarter could be bigger than expected earlier.” 

New orders and new export orders for both manufacturing and non-manufacturing all contracted in July. New export orders for manufacturing had been below 50 for more than a year, but the index for new orders was above 50 in June.