China factory activity expands for first time in four months as Covid-19 curbs ease

BEIJING (REUTERS) – China’s factory and service sectors snapped three months of activity decline in June, business surveys showed on Thursday (June 30), as authorities lifted a strict Covid-19 lockdown in Shanghai, reviving output and consumer spending.

The official manufacturing purchasing managers’ index (PMI) rose to 50.2 in June from 49.6 in May, the National Bureau of Statistics (NBS) said. That slightly missed the forecast for 50.5 in a Reuters poll but rose above the 50-point mark that separates contraction from growth for the first time since February.

Though activity in China is gaining momentum from lengthy Covid lockdowns in April and May, headwinds, including a still subdued property market, soft consumer spending and fear of any recurring waves of infections, persist.

“Today’s NBS numbers were encouraging to see, even if manufacturing slightly underwhelmed and expectations were for an improvement given the easing of lockdown restrictions,” said Matt Simpson, senior market analyst at City Index.

Investors cheered the signs of economic recovery with China’s major stock indices rallying more than 1 per cent and set for their biggest monthly rise in nearly two years.

“Even though the manufacturing sector continued to recover this month, 49.3 per cent of the companies reported orders were insufficient,” said Zhu Hong, senior statistician at NBS. “Soft market demand is still the main problem facing the manufacturing industry.”

“Some firms have faced a squeeze in their profit margins, and relatively huge operating difficulties,” Mr Zhu added.

Shanghai, located at the heart of the Yangtze River Delta manufacturing area, lifted a city-wide lockdown on June 1, allowing more factories in the region to resume production. However, social distancing rules such as those on restaurant dining were still in place throughout June.

An Amcham China survey showed on Thursday supply chains received some relief in June, with fewer companies reporting Covid disruptions but an overwhelming 98 per cent of firms in the poll still experiencing a negative impact from Covid on their business.

Analysts expect further improvement in economic conditions in the third quarter, although the official GDP target of around 5.5 per cent for this year will be hard to achieve unless the government abandons the zero-Covid strategy.

The government said this week that it would slash Covid-19 quarantine requirements for international travellers and removed an indication of travel through Covid-hit cities on a state-mandated mobile app for its citizens, paving way for greater exchanges of people and goods.

However, President Xi Jinping defended the zero-covid policy on Tuesday, saying China is willing to accept some temporary impact on economic development over harm to people’s health.

Strong services rebound

The official non-manufacturing PMI in June improved to 54.7 from 47.8 in May. The services industry staged an impressive rebound, the fastest in 13 months, with sectors that were hard hit by Covid curbs such as retail and road transport catching up with previously depressed demand.

In order to stabilise growth and rein in unemployment, China’s State Council recently announced a broad package of economic support measures and Premier Li Keqiang vowed to achieve reasonable economic growth in the second quarter.

China’s official composite PMI, which includes both manufacturing and services activity, stood at 54.1, compared with 48.4 in May.

However, some analysts doubt the momentum can be sustained over the medium to long-term.

“The PMI employment indices continue to point to weakness in the labour market, suggesting that household finances and consumer confidence remain fragile,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

“Once the reopening boost fades, this will weigh on any further recovery. And compared to 2020, the economy will benefit from fewer tailwinds from export demand and policy stimulus.”