Chinese factory, service sectors shake off 3 months of lockdown pain

A worker polishes a steel rim of a bicycle at a factory that produces sports equipment in Hangzhou, China’s Zhejiang province, 2 September 2019. China Daily via REUTERS

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  • China factory serves PMIs above 50 . for the first time since February
  • Recovery seen as partial easing of COVID restrictions
  • 2022 GDP growth target still ambitious

BEIJING, June 30 (Reuters) – China’s manufacturing and services sectors saw a three-month decline in activity in June, business surveys showed on Thursday, as authorities lifted a strict COVID lockdown in Shanghai, which has hampered manufacturing and consumer spending. were revived.

According to the National Bureau of Statistics (NBS), the Official Purchasing Managers’ Index (PMI) rose from 49.6 in May to 50.2 in June.

That slightly missed the forecast of 50.5 in a Reuters poll, but rose above 50 points separating contraction from growth for the first time since February.

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While activity has accelerated since several COVID lockdowns imposed since March have been reversed, headwinds persist, including a still subdued real estate market, soft consumer spending and fears of returning waves of infections.

“Today’s NBS numbers were encouraging to see, even if production was somewhat disappointing and an improvement was expected as lockdown restrictions are eased,” said Matt Simpson, senior market analyst at City Index.

Investors cheered the signs of economic recovery. Major Chinese stock indices were up more than 1%, heading for their biggest monthly gain in nearly two years.

A manufacturing sub-index came in at 52.8, the highest since March 2021, while new orders also returned to expansionary territory for the first time in four months, although growth remained subdued.

“While the manufacturing sector continued to recover this month, 49.3% of companies reported insufficient orders,” said Zhu Hong, senior statistician at NBS. “Soft market demand is still the manufacturing industry’s biggest problem.”

“Some companies have experienced tighter profit margins and relatively severe operational difficulties,” Zhu added.

Shenzhen’s factory center was closed for a week in March, while Shanghai, located in the heart of the Yangtze River Delta production area, was strictly closed for about two months before the curbs were lifted on June 1.

An Amcham China survey on Thursday showed supply chains received some relief in June, with fewer companies reporting COVID disruptions, but an overwhelming 98% of companies in the poll are 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% for this year will be difficult to achieve unless the government abandons its zero-COVID strategy.

“This wave of economic activity is likely to maintain momentum into July as mobility restrictions are eased further,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management.

“Nevertheless, China is sticking to its zero-COVID policy. I think this means that economic growth is likely to remain below its potential before further easing the policy.”

The government said this week it would lower COVID-19 quarantine requirements for international travelers and remove an indication of travel through COVID-affected cities on a state-mandated mobile app for its citizens, paving the way for more exchange of people and goods. read more

However, President Xi Jinping defended the zero-COVID policy on Tuesday, saying China is willing to accept a temporary impact on economic development rather than harm to people’s health. read more

STRONG SERVICES RETURNED

The official PMI for non-manufactured goods improved from 54.7 to 54.7 in June from 47.8 in May.

The services sector experienced an impressive rebound, the fastest in 13 months, with sectors hard hit by COVID restrictions, such as retail and road transport, catching up on previously suppressed demand.

However, social distancing rules, such as those for dining in restaurants, were still in effect in Shanghai in June.

A construction activity index also rose from 52.2 to 56.6.

To stabilize growth and curb unemployment, the Chinese State Council recently announced a broad package of economic support measures and Prime Minister Li Keqiang promised reasonable economic growth in the second quarter.

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

However, some analysts question whether the momentum can be sustained over the medium to long term.

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

“Once the reopening boost wears off, it will weigh on further recovery. And compared to 2020, the economy will benefit from less tailwinds from export demand and policy stimulus.”

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Reporting by Stella Qiu, Ellen Zhang, Ella Cao and Ryan Woo; Editing by Sam Holmes

Our Standards: The Thomson Reuters Trust Principles.

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