China’s December Manufacturing Industry Contracts at its Fastest Rate for 3 Years

China’s factory activity declined for the third consecutive month in December, and at its fastest pace in almost three years. This was due to Covid infections that swept through the country following Beijing’s sudden reversal in anti-virus measures.

According to the National Bureau of Statistics, the official purchasing manager’s index (PMI), dropped to 47.0 from 48.0 November. According to Reuters, economists had predicted that the PMI would be at 48.0. The 50-point mark is the threshold that separates growth and contraction on a monthly basis.

This was the largest drop since February 2020, when the pandemic began.

This data provided the first official snapshot of China’s manufacturing sector since China lifted the strictest Covid restrictions worldwide in December. Airfinity, a UK-based health data company, estimated that Cumulative Infections reached 18.6 Million in December.

Analysts warn that rising numbers of infections could result in temporary labour shortages, as well as increased supply chain disruptions. Reuters reported Wednesday that Tesla Plan to run a reduced production schedule at its Shanghai plant in JanuaryIt will continue to reduce its output from this month through next year.

A weakening of external demand due to rising global recession fears and rising interest rates, inflation, and the conflict in Ukraine may further slow China’s exports. This could hurt its vast manufacturing sector and hinder an economic recovery.

“Most factories I know are way below where they could be this time of year for orders next year. A lot of factories I’ve talked to are at 50%, some are below 20%,” Cameron Johnson is a partner at Tidalwave, which provides supply chain consulting services.

“So even though China is opening up, manufacturing is still going to slow down because the rest of the world’s economy is slowing down. Factories will have workers, but they will have no orders.”

NBS stated that 56.3% reported being greatly affected by December’s epidemic, an increase of 15.5 percentage point over the previous month. Most also indicated that they believe the situation will improve.

“While (the factory PMI) was lower than expected, it is actually hard for analysts to provide a reasonable forecast given the virus uncertainties over the past month,” Zhou Hao, chief economic economist at Guotai Junan International, said the following:

“In general, we believe that the worst for the Chinese economy is behind us, and a strong economic recovery is ahead.”

This week, the country’s insurance and banking regulators pledged to increase financial support for small and large businesses in the catering industry and tourism sector that were hard hit by the Covid-19 outbreak. They also stressed the importance of a recovery in consumption.

The NBS data also showed that the PMI for non-manufacturing, which measures activity in the services sector, dropped to 41.6 in November, from 46.7, marking the lowest reading since Feb 2020.

The official composite PMI (which combines manufacturing and service) fell to 42.6 from 47.1.

“The weeks before Chinese New Year are going to remain challenging for the service sector as people won’t want to go out and spend more than necessary for fear of catching an infection,” Mark Williams, Capital Economics’ Chief Asia Economist, said:

“But the outlook should brighten around the time that people return from the Chinese New Year holiday – infections will have dropped back and a large share of people will have recently had Covid and feel they have a degree of immunity.”