China’s factory activity contracted in December, according to a private survey, highlighting the economic costs of the country’s abrupt abandonment of its strict zero-Covid regime as it battled a nationwide wave of infections.
The Caixin purchasing managers’ index, a private gauge of operating conditions in China’s manufacturing sector, showed a reading on Tuesday of 49 for December, its lowest level since September and down from 49.4 in November.
China’s official PMI data, released over the weekend, showed a steeper decline in economic activity. Its manufacturing and services gauges came in at 47 and 41.6, respectively, both falling to their lowest levels since early 2020 at the beginning of the Covid-19 pandemic. A reading below 50 indicates a contraction, while one above 50 signals an expansion.
China’s economy, which was until recently languishing under severe pressure from restrictions designed to keep the virus at bay, is now grappling with the impact of a sudden reopening and spiralling outbreaks in major cities.
As many as hundreds of millions of people may have been infected with Covid by late December, according to internal government estimates, just weeks after authorities began to relax President Xi Jinping’s anti-Covid measures.
In Beijing and other major cities, hospitals have been overwhelmed by a wave of elderly and vulnerable patients, while supplies of fever medication and antivirals have run low.
Carlos Casanova, senior economist at UBP in Hong Kong, suggested that while the pandemic restrictions were an initial drag on growth in the fourth quarter, the “explosion in Covid cases” was the more significant factor in the weak PMI data.
“The key message from the PMI data is that the reopening wave is proving very disruptive,” said Julian Evans-Pritchard, chief China economist at Capital Economics. “The market euphoria from the shift away from zero-Covid sort of overlooked how disruptive the transition would be.”
The virus will be officially downgraded on January 8, when international arrivals will no longer be required to quarantine.
The December weakness in manufacturing activity — which marked a fifth consecutive month of declines for the Caixin manufacturing PMI — followed a long period of economic fragility. Other metrics, including retail sales, a crucial measure of consumption, also deteriorated towards the end of 2022.
China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks has slipped 1.5 per cent over the past month, though it has edged higher in the past week since the announcement of the end of zero-Covid.
China’s economy is set to miss a 5.5 per cent annual growth target for 2022 — already the lowest in decades — with economists polled by Bloomberg forecasting full-year growth of just 3 per cent.
In addition to the wave of Covid infections, policymakers are wrestling with a property crisis that has weighed on the economy for more than a year as well as slowing exports, which supported growth during the earlier stages of the pandemic.
The Caixin survey nonetheless held a slim silver lining for the economy’s outlook, with factory managers reporting increased confidence for the year ahead as the rapid spread of cases drove expectations of an improvement after the peak of the wave passed.
“Almost certainly by February things will be past the worst and will start to rebound,” said Evans-Pritchard.
