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China’s factory activity unexpectedly shrinks in July as COVID flares

China's factory activity unexpectedly shrinks in July as COVID flares
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Employees work on the production line of vehicle components during a government-organized media tour to a plant of German engineering group Voith following the outbreak of the coronavirus disease (COVID-19) in Shanghai, China July 21, 2022. REUTERS/Aly Song

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  • China’s official manufacturing PMI in July below forecast
  • July public services PMI growing at slower pace
  • COVID Outbreaks, Global Demand Cooling, Key Real Estate Risks
  • Big stimulus considered unlikely, government omits growth target

BEIJING, July 31 (Reuters) – China’s factory activities unexpectedly fell in July after recovering from COVID-19 lockdowns the month before, as renewed virus outbreaks and a clouding global outlook weighed on demand, a survey showed on Wednesday revealed Sunday.

The official purchasing managers’ index (PMI) for manufacturing fell to 49.0 in July from 50.2 in June, according to the National Bureau of Statistics (NBS), below the 50-point mark separating contraction from growth and the lowest value in three months.

Analysts polled by Reuters had expected a reading of 50.4.

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“The level of economic prosperity in China has declined, the basis for recovery has yet to be consolidated,” NBS senior statistician Zhao Qinghe said in a statement on the NBS website.

The continued decline in energy-intensive industries like gasoline, coking coal and ferrous metals were the most contributors to dragging the manufacturing purchasing managers’ index down in July, he said.

The manufacturing and new orders sub-indices fell 3 points and about 2 points, respectively, in July, while the employment sub-index slipped 0.1 point.

Weak demand has held back the recovery, Bruce Pang, chief economist and head of research at Jones Lang Lasalle Inc, said in a research note. “Q3 growth may face more challenges than expected as the recovery is slow and fragile,” he added.

The official non-manufacturing PMI fell to 53.8 in July from 54.7 in June. The official composite PMI, which includes manufacturing and services, fell to 52.5 from 54.1.

China’s economy barely grew in the second quarter amid widespread lockdowns, and top executives have recently signaled their strict zero-COVID policies will remain a top priority. Continue reading

Policymakers are poised to miss their GDP growth target of “around 5.5%” for this year, state media reported after a high-level meeting of the ruling Communist Party. Continue reading

Beijing’s decision to no longer mention the target has fueled speculation that the authorities would introduce massive stimulus measures, as they have often done in previous downturns.

Capital Economics says policy dovishness, coupled with the constant threat of more lockdowns and weak consumer confidence, is likely to prolong China’s economic recovery.

DISTURBING RECOVERY

After a rebound in June, the world’s second-largest economy has stalled as the COVID flare-up led to tightening restrictions on activity in some cities, while the once-mighty housing market tumbles from crisis to crisis.

Chinese manufacturers continue to struggle with high commodity prices weighing on profit margins as export prospects continue to be clouded by fears of a global recession.

China’s southern megacity Shenzhen has vowed to “mobilize all resources” to contain a slow-spreading COVID outbreak, ordering strict testing and temperature checks and lockdowns for COVID-affected buildings. Continue reading

The port city of Tianjin, home to factories associated with Boeing (BAN) and Volkswagen and other divisions tightened curbs this month to combat new outbreaks. Continue reading

According to World Economics, lockdown measures had some impact on 41% of Chinese companies in July, although the manufacturing confidence index rose sharply to 51.7 in July, from 50.2 in June.

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Reporting from Beijing Newsroom; Edited by William Mallard and Himani Sarkar

Our standards: The Thomson Reuters Trust Policy.

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