China’s production is unexpectedly shrinking, and services are providing support

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Employees work on the production line of the American baby products and toy manufacturer Kids II Inc. in a factory in Jiujiang, Jiangxi Province, China June 22, 2021. REUTERS / Gabriel Crossley

  • Official PMI for September production at 49.6 compared to 50.1 in August
  • Official services PMI in September at 53.2 compared to 47.5 in August
  • Official composite PMI for September at 51.7 up from 48.9 in August

BEIJING, Sept. 30 (Reuters) – China’s factory activity unexpectedly declined in September due to greater restrictions on electricity usage and increased input prices, while services expanded again as the COVID-19 outbreak fell, providing some relief to the world’s second largest economy .

The official purchasing managers’ index (PMI) for manufacturing stood at 49.6 in September, down from 50.1 in August, data from the National Bureau of Statistics (NBS) showed on Thursday, slipping into contraction for the first time since February 2020 .

Analysts in a Reuters poll had expected the index to remain stable at 50.1, unchanged from the previous month. The 50-point mark separates growth from contraction.

China’s economy recovered quickly from a pandemic-induced slump last year, but momentum has slowed in recent months as its sprawling manufacturing sector has been hit by rising costs, production bottlenecks and power rationing.

Rising COVID-19 cases in dozens of cities over the summer have also disrupted manufacturing and services, although the latter is recovering as outbreaks decline.

A sub-index for factory production contracted in September for the first time since February last year, as it was dragged down by a decline in energy-intensive industries such as metal and petroleum processing plants. The value was 49.6 compared to 50.1 a month earlier.

“In September, the manufacturing PMI fell below critical point due to factors such as low business volume in high-energy-consuming industries,” said Zhao Qinghe, a senior statistician for NBS, in an accompanying statement.

“The two indices for high-energy industries … are both below 45.0, indicating a significant decline in supply and demand.”

GROWTH OUTLOOK

The sudden decline in factory activity will continue to weigh on an economy already hit by constraints in the real estate and technology sectors and facing many growth downgrades by private sector operators. Continue reading

Other Asian economies are also struggling with production problems due to supply chain disruptions. Thursday’s data shows that Japanese industrial production declined for the second straight month in August. Continue reading

“(Chinese) economic growth in the fourth quarter is likely to continue to slow without a change in government policy, and the pace of slowdown may accelerate,” said Zhiwei Zhang, chief economist of Pinpoint Asset Management, Shenzhen, after the PMI data was released.

“The big question is whether the government’s monetary and fiscal policies will become more supportive now or whether the government will wait until the end of the year to change policies.”

The central bank last relaxed its requirements for banks’ cash holdings in mid-July, shortly before a surge in domestic COVID-19 cases.

The People’s Bank of China (PBOC) left its prime rate on corporate and personal loans unchanged for the 17th month in September. Continue reading

HIGH PRODUCTION COSTS

Coal shortages, stricter emission standards, and strong demand from manufacturers and industry pushed coal prices to record highs and led to widespread restrictions on electricity consumption in at least 20 provinces and regions. Continue reading

Higher raw material prices, particularly of metals and semiconductors, have also put manufacturers’ profits under pressure. Chinese industrial company profits slowed for the sixth straight month in August. Continue reading

A sub-index for raw material costs rose in September from 61.3 in the previous month to 63.5, while incoming orders stood at 49.3 compared to 49.6 in August and thus contracted for the second month in a row.

A sub-index for employment fell to 47.8 from 47.0 a month earlier.

A separate private survey, also published Thursday, which focuses on small and export-oriented companies, showed that factory activity neither increased nor decreased in September. Continue reading

In more sanguine terms, the official non-manufacturing PMI stood at 53.2 in September and rebounded from 47.5 in August, data from the NBS showed as COVID-19 outbreaks receded after rising during the summer months.

Last month, COVID-19-related restrictions resulted in a sharp decline in service sector activity for the first time since the peak of the pandemic last year.

The official composite PMI for September, spanning both manufacturing and service activity, was 51.7 compared to 48.9 in August.

Reporting by Ryan Woo and Gabriel Crossley; Editing by Tom Hogue and Ana Nicolaci da Costa

Our Standards: The Thomson Reuters Trust Principles.


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