A private index measuring activity at factories in China fell to 49.1 in January from December’s 50.9. It’s the lowest level for the Caixin/Markit manufacturing Purchasing Managers Index since February 2020, when the coronavirus first paralyzed large swathes of the Chinese economy.
It’s also the sharpest contraction in industrial output since the pandemic initially broke out. A reading below 50 indicates contraction, while anything above that gauge shows expansion.
“The recent uptick in Covid-19 cases in China, and subsequent round of fresh restrictions, weighed on manufacturing performance at the start of 2022,” the index’s compiler, IHS Markit, said in a statement Sunday. The private survey is focused on small and medium-sized companies.
Bigger and state-owned firms didn’t seem to fare much better, according to data released by the government on Sunday. The official manufacturing Purchasing Managers Index dropped to 50.1 in January from December’s 50.3. The official non-manufacturing PMI also fell to 51.1 in January from December’s 52.7.
China’s National Bureau of Statistics attributed the declines partly to “sporadic Covid outbreaks.”
The tightening Covid curbs in the past month have “restricted production, transportation and sales of manufactured goods,” IHS Markit said. The index compiler added that the spread of the Omicron variant overseas has dampened demand for Chinese goods outside of the country.
Julian Evans-Pritchard, senior China economist for Capital Economics, said that cooling activity in China’s troubled real estate sector also likely weighed on economic growth.
“We think industry will remain weak given that property construction is in the early stages of a structural slowdown and exports are likely to turn less supportive,” he wrote in a Monday research report.
Other analysts are also concerned about the hardships facing small private businesses.
China’s strict zero-Covid policy and economic issues stemming from a slowdown in the real estate sector have put those businesses in a “very difficult situation,” Citi analysts wrote in a Monday research report.
Even so, Evans-Pritchard expects services activity, at least, to recover somewhat as authorities fine-tune their zero-Covid approach.
“It’s noteworthy that more people are traveling this Lunar New Year holiday season than last year, despite a worse virus outbreak,” he said. “If sustained, we think this lighter touch approach to virus control will help drive a tepid recovery in economic activity over the course of this year.”
Analysts expect Chinese authorities to continue easing monetary policy after the week-long Lunar New Year holiday, which starts this week. They also predict China will roll out more tax cuts to support small businesses.