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China’s economy under pressure as factory activity slows in August, service contract

A worker wearing a face mask works on a production line to make bicycle steel rims at a factory in Hangzhou, Zhejiang Province, China, March 2, 2020 as the country is hit by the novel coronavirus outbreak. China Daily about REUTERS

  • Twin PMI surveys suggest growing pressures on businesses
  • Polls suggest that the economy contracted in August – economist
  • High raw material prices, COVID-19 restrictions are hurting the economy
  • Analysts expect more political support later in the year

BEIJING, Aug. 31 (Reuters) – China’s corporations and the general economy came under increasing pressure in August as factory activity expanded more slowly while the service sector collapsed, increasing the likelihood of short-term policy support to fuel growth.

The world’s second largest economy has seen a formidable rebound from a coronavirus-ridden slump, but the momentum has slowed lately due to domestic COVID-19 outbreaks, high commodity prices, slowed exports, tighter measures to tame hot house prices and a campaign to lower attenuated carbon emissions.

The official purchasing managers’ index (PMI) for manufacturing fell from 50.4 in July to 50.1 in August, data from the National Bureau of Statistics (NBS) showed on Tuesday, and stayed just above the 50 point mark, which separates growth from contraction.

Analysts polled by Reuters had expected the value to drop to 50.2.

“The worse than expected PMIs for August confirm our view that the slowdown in growth in the second half of the year could be quite remarkable,” wrote Nomura economists in a statement.

“We expect Beijing to maintain its policy combination of ‘targeted tightening’ for some sectors, particularly real estate and highly polluting industries, complemented by ‘universal easing’ for the rest of the economy.”

Nomura is not alone in its views as many other analysts also expect the central bank to increase the amount of cash banks will need to hold as reserves later this year to spur growth, in addition to last month’s cut in around 1 trillion yuan has been released, which will further cut ($ 6.47 trillion) of long-term liquidity in the economy.

The purchasing managers’ index for the manufacturing sector showed a sharp drop in demand, with declining incoming orders and a drop in new export orders to 46.7, the lowest level in over a year. Factories also laid off workers at the same rate as in July.

DEVIATION IN THE SERVICE SECTOR

In addition to signs of an expanding economic slowdown, COVID-19-related restrictions resulted in a sharp decline in service sector activity for the first time since the peak of the pandemic in February last year.

The official purchasing managers’ index for the non-manufacturing sector was 47.5 in August, well below the 53.3 in July, according to data from the NBS.

“The latest polls suggest that China’s economy contracted (in August) as virus disruptions weighed heavily on service activity. Industry also continued to pick up as supply chain bottlenecks worsened and demand subsided, ”Julian Evans-Pritchard, chief economist in China for capital economics, said in a note.

While most of the weakness should be reversed with relaxation of COVID-19 restrictions, tight credit terms and declining foreign demand will continue to weigh on the Chinese economy, he said.

“This epidemic in several provinces and locations was quite a shock to the service industry, which is still booming,” said Zhao Qinghe of the NBS.

The food service, transportation, accommodation and entertainment industries are hardest hit, said Zhao. Construction activity accelerated to the fastest pace since March.

There are indications that China may have largely contained recent coronavirus outbreaks, with no locally transmitted cases reported on Aug. 30 for the third day in a row.

But it spurred authorities across the country to impose measures such as mass tests on millions of people, as well as travel restrictions of varying degrees and port closings.

The Meishan Terminal in the Chinese port of Ningbo resumed operations in late August after being closed for two weeks due to a COVID-19 case. The closure resulted in congestion in ports in the country’s coastal regions and put further strain on global supply chains amid a resurgence in consumer spending and a shortage of container ships.

Higher raw material prices, particularly metals and semiconductors, have also put pressure on profits. Chinese industrial company profits slowed for the fifth straight month in July.

The official composite PMI for August, which includes both manufacturing and service activities, fell to 48.9 from 52.4 in July.

Reporting by Gabriel Crossley Editing by Shri Navratnam

Our Standards: The Thomson Reuters Trust Principles.

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