China's economy weakens, signs point to more strain ahead amid Covid curbs

China’s factory and services activity contracted in October, with signs that things could worsen in the coming months as the government sticks to Covid controls that have disrupted activity across the world’s second-largest economy.
 

Both the official manufacturing purchasing managers index and the non-manufacturing gauge, which measures construction and services activity, fell in the month to 49.2 and 48.7, respectively, missing economists’ expectations. A reading below 50 indicates contraction in activity, while anything above suggests expansion.

“Today’s data suggest it is too early to bet on China’s economic recovery” despite recent third-quarter economic data performing better than expected, said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. “Rising Covid, lackluster property and falling exports are dragging China’s growth momentum.”

Chinese stocks flipped into gains after earlier losses Monday. The benchmark CSI 300 Index was up 0.2% as of 11:15 a.m. local time. The yield on China’s 10-year government bond fell 2 basis points to 2.64%, while the onshore yuan weakened 0.2% to 7.261 per dollar.

Even though recent data showed economic growth strengthened to 3.9% in the third quarter, there have been signals of weakness again as Covid outbreaks worsen, creating more disruptions for businesses and residents. Sunday marked the biggest nationwide surge in infections since August as cases topped 2,600, and workers at Apple Inc.’s biggest iPhone plant in the country have been leaving to escape Covid measures. 

Beijing is expected to keep Covid Zero in place until at least March 2023, wrote economists at Nomura Holdings Inc. led by Lu Ting in a Monday note. They added that the lockdown situation will likely worsen “due to the winter season and more infectious variants,” and said they expect export growth to keep sliding and the property sector to deteriorate further “on the lack of a comprehensive solution.”

Early indicators including car and real-estate sales weakened in October, while global trade and small business confidence contracted, pointing to a grim outlook for the economy. 

Covid controls were heightened in some areas ahead of the twice-a-decade party congress in October, in which President Xi Jinping secured an third term in power, with the tighter restrictions hitting tourism revenue during the week-long national holiday at the beginning of the month. 

What Bloomberg Economics Says...
 

“As grim as China’s October PMIs are, the broad tumble into contraction probably doesn’t capture all the weakness in the economy. The slides in the manufacturing and non-manufacturing PMIs below 50 were steeper than expected. What’s more, the survey wrapped up on Oct. 25 -- before fresh Covid curbs were applied to contain more outbreaks. The message is clear -- growth is turning down again.”

-- David Qu and Chang Shu, economists

Things appear to have gotten even more severe since then. A survey released last week from Nomura estimated that the number of places under lockdown had risen to 9.2% of China’s total gross domestic product, up from 7% of GDP in mid-October. 

NBS analyst Zhao Qinghe acknowledged the impact of Covid rules on PMI in a statement accompanying the data, saying the fall in October’s data was due to sporadic outbreaks, adding that “there is a need for a further steadying of foundations for a recovery.”

PMI sub-indexes were weak across the board as new orders for manufacturing fell, input and output prices rose and job losses appeared to mount -- indexes measuring manufacturing and non-manufacturing employment both slid. A  sub-gauge measuring suppliers’ delivery times declined, a sign of disruption to manufacturing logistics.

While the government’s infrastructure push has boosted production of construction materials like steel, providing some lift to manufacturing, the recovery is still being held back.

“The key takeaway here is that you can do more infrastructure and manufacturing investment, but it also depends on how much of a hole you have to fill in between the property slowdown and the Covid impact,” Hui Shan, chief China economist at Goldman Sachs Group Inc., said in an interview with Bloomberg TV.

Tuesday’s Caixin manufacturing PMI may show an even worse picture for the nation’s smaller and more export-oriented businesses. Economists project that index will record a contraction of 48.5, only marginally less severe than September’s 48.1 reading. The index has been in contraction since August.