For the first time in since April 2020, China’s factory activity contracted in August despite COVID-19 containment measures, rising prices of raw material and adjustments in supply bottlenecks weighed on production output in a surprise blow to the economy.
This slowdown in the manufacturing sector underscores the fragility of the ongoing economic recovery backing expectations that China is likely to further inject support measures to promote economic growth.
According to the results of two official surveys, that were released on Tuesday, China’s factory activity grew at a slower pace than expected while its services sector went into contraction.
In July, the Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) fell to 49.2 from 50.3, breaching the 50-mark that separates growth from contraction.
“The latest COVID-19 resurgence has posed a severe challenge to the economic normalization that began in the second quarter of last year,” said Wang Zhe, senior economist at Caixin Insight Group.
Analysts expect the central bank to deliver a further cut to the cash reserves banks must hold to lift growth; this will be on top of July’s cut which released around $6.47 trillion (1 trillion yuan) in long-term liquidity into the economy.
According to Chinese companies, strict COVID-19 measures had dampened demand and led to sourcing difficulties.
A shortage of chips has also been crimping manufacturing.
“Our factory has been continuously reducing production, and in July and August, I heard that some factories stopped production. At the moment it looks like chips will continue to be in short supply,” said an auto parts exporter in eastern China’s Suzhou.
“Authorities need to take a holistic view and balance containing COVID-19, stabilizing the job market, and maintaining stability in supply and prices,” said Caixin’s Wang.