Manufacturing activity in China slows for the first time since April 2020

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Chinese Economy Updates

One of the most important indicators of China’s manufacturing activity has contracted for the first time since the early stages of the coronavirus pandemic, raising expectations that Beijing will step up measures to support the economy.

The Caixin Manufacturing Purchasing Managers Index, an independent survey of factory activity, stood at 49.2 in August, falling below the 50 mark that separates monthly expansion from contraction for the first time. times since April 2020.

The data came out a day after official manufacturing PMI data stopped just before the contraction, but at 50.1 it posted its weakest reading since February of last year. Its measurement of the service sector plunged into negative territory as a recent Covid-19 epidemic weighed on activity.

The indices are one of the clearest signs to date of a slowdown in China’s economy, which outperformed other major economies last year thanks to an industry-fueled recovery. But China is now grappling with weaker export demand, high commodity prices and a slowdown in the real estate sector.

Several analysts recently lowered their growth forecasts and are anticipating further government action after the People’s Bank of China cut its reserve requirement ratio for banks in July, which injected liquidity into the financial system. David Chao, global markets strategist at Invesco, said PMI data “could be a worrying sign for upcoming monthly economic data.”

“To cushion the deteriorating macroeconomic environment, we believe policymakers could step up monetary and fiscal stimulus,” he said.

An outbreak of the Delta variant of the coronavirus, which has led to strict restrictions on travel, has affected activity in a service sector that had already lagged behind the broader recovery as households remained cautious.

Zhiwei Zhang, chief economist at Pinpoint Asset Management, said the decline in official services PMI could be attributed to the outbreak, but the weakness in manufacturing “likely indicates more persistent pressure the economy is facing, as the real estate cycle cools “.

China’s real estate sector is a key driver of global economic activity, and construction soared last year, but major developers have come under pressure from Beijing to reduce their debt levels. A rate cut last year fueled concerns of an asset bubble in the real estate sector, where local authorities have also taken steps to control prices.

“The ongoing monetary and fiscal easing measures appear insufficient to reverse the downward trend in growth, as the slowdown in the real estate sector is too strong to be fully offset,” Ting Lu, chief economist at Nomura, said during ‘an investor forum this week.

In July, a sign of the policies coming into effect, new home prices rose at their slowest pace in six months, with average prices in 70 cities rising 0.3% month-on-month , according to Reuters calculations based on data from the National Bureau of Statistics.

Additional reporting by Sherry Fei Ju in Beijing

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