China PMI contracts as Covid outbreaks spark lockdowns

China’s manufacturing and services activity contracted in March for the first time in almost two years, highlighting the economic strains of the government’s strict coronavirus measures.

The official manufacturing PMI, a gauge of factory activity in which a reading of 50 separates monthly expansion from contraction, fell to a five-month low of 49.5. The non-manufacturing PMI dropped to 48.4, its lowest level since August.

The PMI data were released just hours after state media reported that Premier Li Keqiang, head of China’s State Council, was preparing efforts to support economic growth, which has been hit by Covid-19 outbreaks in Shanghai and north-eastern Jilin province.

While the specific measures were not revealed, the State Council noted that 40 per cent of this year’s Rmb3.65tn ($575bn) quota for special-purpose bonds — largely used for infrastructure investment — had already been dispersed. It also warned government agencies to refrain from “measures detrimental to the stabilisation of market expectations” and to prepare “contingency plans to deal with the possibility of encountering greater uncertainties”.

Zhao Qinghe, senior statistician at the National Bureau of Statistics, said coronavirus outbreaks across China were affecting enterprises. He noted some companies had complained of insufficient personnel owing to the virus and added that a gauge of delivery times was at its lowest level since March 2020, shortly after the pandemic erupted in central China.

The State Council’s pledge marked the second time in as many weeks that the Chinese government had attempted to shore up confidence in the country’s economic outlook.

On March 16, a State Council committee headed by Liu He, President Xi Jinping’s closest economic adviser, made similar pledges in an effort to reassure investors rattled by Covid outbreaks as well as the economic fallout of Russia’s invasion of Ukraine.

In the wake of Liu’s intervention, the finance ministry said it would not proceed with long-delayed plans to introduce a property tax in various cities. China’s securities regulator also urged state-owned enterprises and financial institutions to help stabilise the country’s financial markets.

China is battling its worst Covid-19 outbreaks in two years after largely containing the virus since its initial outbreak through strict lockdown measures, quarantine, travel restrictions and mass testing.

This week, Shanghai, the country’s main financial centre, was locked down for universal testing that divided the city in half and sealed it off from the rest of the country. Previously, officials had indicated no lockdown would be imposed.

The four-day lockdown of Shanghai’s eastern Pudong region, which is home to about 9mn people and includes its famous financial district, is scheduled to end at 5am on Friday morning. About 16mn people living in the city’s western Puxi area will then begin their four-day lockdown.

On Thursday, Shanghai officials said that 5,653 cases had been confirmed on March 30, down slightly from 5,982 a day earlier.

Julian Evans-Pritchard, senior China economist at Capital Economics, said the PMI data “suggests that the economy is contracting at its fastest pace since the height of the initial Covid-19 outbreak in February 2020”.

The non-manufacturing decline was “driven entirely by a sharp drop in the services index”, he added, “as strict movement restrictions and citywide lockdowns were reimposed, and consumers became more cautious amid the renewed virus flare-up”.

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