China factory, services activity contract together for first time since 2020 amid lockdowns

Beijing

CHINA'S Covid-19 lockdowns are putting the economy under strain and threatening to disrupt global supply chains, prompting Beijing to call for more contingency plans to deal with the risks.

Activity in Chinese manufacturing and services contracted simultaneously in March for the first time since the height of the country's Covid-19 outbreak in 2020.

The purchasing managers' indexes (PMIs) for March showed that lockdowns in technology and trade centre Shenzhen and automotive city Changchun cut factory activity in the month.

Services have also been hit hard as restaurants and retail shops close because of renewed restrictions and tightened social distancing measures.

The manufacturing PMI fell to 49.5, breaching the 50-mark that separates expansion from contraction for the first time in five months, latest data from the National Bureau of Statistics (NBS) showed on Thursday (March 31).

It was an unprecedented fall as the indicator had before now risen from February every year as people return to work and businesses start up again after the Chinese New Year holidays.

The non-manufacturing gauge, which measures activity in the construction and service sectors, slumped to 48.4.

Supply chain scares are intensifying as Shanghai - home to the world's largest container port - battles mounting infections.

Covid-19 controls in the city are impacting operations and reducing efficiency at the port, while shipping giant AP Moller-Maersk has already shut some facilities in the city.

"Beijing's determination in maintaining its zero-Covid strategy for fighting the infectious Omicron variant will very likely deal a severe blow to China's economy and will also have a global impact," economists at Nomura Holdings wrote in a note.

"Markets so far have underestimated the severity of the situation in China because it is difficult to fully reconcile and understand."

The worsening situation puts pressure on policymakers to step up fiscal and monetary support.

On Wednesday, Premier Li Keqiang reiterated that China will stick to its full-year growth target of about 5.5 per cent despite new challenges and increased risks.

At a regular State Council meeting, he said stable growth should be a priority and contingency plans should be drafted to deal with possible greater uncertainties.

Economists warn the situation could worsen in April, denting growth for the second quarter as uncertainty grows about the scope, severity and length of China's lockdowns.

Areas covering roughly 30 per cent of China's gross domestic product are affected by the outbreaks, according to Goldman Sachs.

Natixis estimates a 1.8 percentage point cut to the first-quarter growth rate because of the Covid-19 controls.

"As the Shanghai lockdown happened only in late March, economic activities will likely slow further in April," said Zhang Zhiwei, the chief economist at Pinpoint Asset Management.

"The government has made it clear that the priority is to contain Omicron outbreaks, which indicates the willingness to sacrifice growth in the short term if necessary."

In Shenzhen, companies like Apple supplier Hon Hai Precision Industry, better known as Foxconn, temporarily shuttered during a week-long lockdown in March.

In Changchun, an industrial hub that accounted for about 11 per cent of China's total annual car output in 2020, carmakers like Toyota Motor were forced to close.

Some businesses were able to resume work by adopting a so-called closed loop system in which employees were kept at factory locations and tested regularly.

Still, small and medium-sized companies took a big knock and continued to contract in March, the PMI surveys showed.

The disruptions affected the "stability" of the manufacturing supply chain, said Zhao Qinghe, a senior statistician at NBS, noting an index measuring delivery time of suppliers fell to 46.5, the lowest since February 2020.

Some companies surveyed said there were "insufficient employees working in their posts", he said, adding that firms also cited clogged logistics and extended delivery cycles. BLOOMBERG