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China Factory Activity Gradually Improves as Lockdowns Ease

Published 05/30/2022, 09:58 PM
Updated 05/30/2022, 10:09 PM
© Reuters.  China Factory Activity Gradually Improves as Lockdowns Ease

(Bloomberg) -- China’s factories continued to contract but at a slower pace in May as many of the country’s tightest Covid restrictions began lifting gradually in some areas, indicating the worst of the current economic slump is close to an end.

The official manufacturing purchasing managers index rose to 49.6 from 47.4 in April, according to data released by the National Bureau of Statistics on Tuesday. That compares with the median estimate of 49 in a Bloomberg survey of economists. 

The non-manufacturing gauge, which measures activity in the construction and services sectors, increased to 47.8 from April’s 41.9, above the consensus forecast of 45.5. A reading above 50 indicates expansion, while anything below indicates a contraction.

Covid outbreaks, along with international factors, “have had a great impact on economic operation,” said Zhao Qinghe, senior statistician at the NBS. Increases in production and new orders sub-indexes showed “manufacturing production and demand have recovered to varying degrees, but the recovery momentum still needs to be strengthened.”

The main sub-indexes rebounded in May from April, with the sharpest improvement seen in new orders -- though those sub-gauges remained in contraction. An index measuring the delivery time of suppliers rose to 44.1 from 37.2, suggesting that it’s taking less time for raw materials to reach their manufacturing customers.

China’s benchmark CSI 300 Index added 0.5% as of 9:45 a.m. after gaining in the previous four sessions, with consumer staples and financials leading the rise.

The outlook for China’s economy has darkened this year amid widespread Covid outbreaks and stringent controls to curb infections. Economic activity collapsed in April, with retail sales and industrial output shrinking and the jobless rate soaring. Economists now predict growth will weaken to 4.5% this year, well below the government’s target of around 5.5%. 

While the lockdown of Shanghai that spurred a lot of the disruption has begun to ease, allowing some activity such as port operations to recover, the effects of the restrictions on production and supply chains will still likely be felt for months as businesses struggle to restart.

A set of early indicators measuring business confidence, declines in home and car sales and other metrics suggested China’s economy remained deep in a slump in May. Small business confidence, for example, dropped to the worst level since the early months of the pandemic.

Even if China manages to right its supply chains quickly, any sustained recovery is still challenged by a lack of demand. The threat of a cycle of Covid lockdowns should there be more outbreaks has weighed on business confidence, making them more cautious about expanding. Consumers are also likely save up, rather than spend, if they’re uncertain about the future. 

Beijing has tried to support growth through a variety of measures, and recently rolled out a broad support package that covered everything from consumption and investment to tax cuts and loan support. Premier Li Keqiang has also repeatedly called for local governments to do more to stabilize growth, warning of dire consequences if they don’t move decisively. 

(Updates throughout with additional context and figures, official quote.)

©2022 Bloomberg L.P.

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