China's factory activity contracts as cities go into lockdown

[BEIJING] China's manufacturing activity contracted in March as authorities locked down major technology and factory hubs to curb a surge in Covid cases, damaging the outlook for economic growth.

The official manufacturing purchasing managers' index fell to 49.5, breaching the 50-mark that separates expansion from contraction for the first time in 5 months, data from the National Bureau of Statistics showed Thursday (Mar 31). That was lower than the median estimate of 49.8 in a Bloomberg survey of economists.

The non-manufacturing gauge, which measures activity in the construction and services sectors slumped to 48.4, below the consensus forecast of 50.3.

China is battling its worst outbreak since the initial flareup 2 years ago. Soaring case numbers prompted authorities to lock down major cities including the country's tech and manufacturing hub Shenzhen, financial centre Shanghai and automotive centre Changchun this month.

Areas covering roughly 30 per cent of China's gross domestic product are affected by the outbreaks, Goldman Sachs Group estimates, with the economic costs of the lockdowns likely amounting to at least US$46 billion a month, or 3.1 per cent of GDP, according to a researcher from Chinese University of Hong Kong.

The drop in the March manufacturing reading comes despite a seasonal boost to output following the Chinese New Year holidays. Companies like Apple supplier Foxconn temporarily halted production in Shenzhen during a week-long lockdown of the city. In Changchun, an industrial hub that accounted for about 11 per cent of China's total annual car output in 2020, automakers like Toyota Motor were forced to shut.

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Some businesses resumed production by adopting a so-called closed loop system in which workers were kept at factory locations and tested regularly.

In-person services sectors like restaurants and retail shops were hit hard by the renewed lockdowns and tightened social distancing measures, dragging the official non-manufacturing index lower. Economists say the damage to consumption could be deeper and more long-lasting than to production.

The world's second-largest economy was already struggling even before the current wave of outbreaks following a slump in the property market and weakness in consumer spending. The government has pledged more monetary and fiscal stimulus to help bolster the economy and meet a growth target of "around 5.5 per cent" for the year.

China's Premier Li Keqiang reiterated Wednesday that China will stick to its full year growth target despite new challenges and increased downward on growth.

He called on the nation to prioritise stable growth and to draft contingency plans to deal with possible greater uncertainties at a regular State Council meeting. Policies to stabilise growth should be rolled out as early as possible, while measures that would dampen market expectations should be avoided, he said. BLOOMBERG