China’s production is declining unexpectedly, services provide support

China's production is declining unexpectedly, services provide support

BEIJING, Sept 30 (Reuters) – China’s factory activity unexpectedly shrank in September due to wider curbs on electricity use and elevated input prices, while services returned to expansion as COVID-19 outbreaks receded, offering some relief to the world’s second-biggest economy.

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

Rising COVID-19 cases in tens of cities over the summer also disrupted the manufacturing and the services sectors, though the latter is starting to bounce back as the outbreaks receded.

China’s economy rapidly recovered from a pandemic-induced slump last year, but momentum has weakened in recent months, with its sprawling manufacturing sector hit by rising costs, production bottlenecks and electricity rationing.

Story Highlights

  • Sept official manufacturing PMI at 49.6 vs 50.1 in AugSept official services PMI at 53.2 vs 47.5 in AugSept official composite PMI at 51.7 vs 48.9 in Aug

  • The official manufacturing Purchasing Manager’s Index (PMI) was at 49.6 in September versus 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.

A sub-index for factory output contracted in September for the first time since February last year, dragged down by a pullback in high-energy consuming industries, such as plantsthat process metalsand oil products. The gauge stood at 49.6 versus 50.1 a month earlier.

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

“The two indexes of high energy-consuming industries …are both lower than 45.0, indicating a significant drop in supply and demand.” GROWTH OUTLOOK

The sudden contraction in factory activity will further weigh on an economy already hit by curbs on its property and tech sectors and facing many growth downgrades by private-sector economists. Other economies in Asia are also grappling with production issues due to supply chain disruptions, with data on Thursday showing Japan’s industrial output falling for a second straight month in August.

“(Chinese) economic growth in Q4 will likely slow further without a change of government policies, and the pace of slowdown may pick up,” said Zhiwei Zhang, Shenzhen-based chief economist at Pinpoint Asset Management, after the PMI data was released. “The big question is whether the government’s monetary and fiscal policies will become more supportive now or if the government will wait till the year-end to change the policies.”

HIGH PRODUCTION COSTS A shortage of coal, tougher emissions standards and strong demand from manufacturers and industry pushed coal prices to record highs and triggered widespread curbs on electricity usage in at least 20 provinces and regions.

The People’s Bank of China (PBOC) has left its benchmark lending rate for corporate and household loans unchanged for the 17th month in September. The central bank last eased its requirements on how much cash banks should hold in mid-July, just before a surge in domestic COVID-19 cases.