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China’s factory activity unexpectedly contracts in July as COVID-19 flares up

China's factory activity unexpectedly contracts in July as COVID-19 flares up
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Employees work on the production line of vehicle components during a government-organized media tour of a factory of German engineering group Voith, following the outbreak of the coronavirus disease (COVID-19), in Shanghai, China, on July 21, 2022. REUTERS/Aly Song

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  • China’s official July manufacturing PMI below forecast
  • July official services PMI grows at a slower pace
  • COVID outbreaks, global demand cooling, key property risks
  • Unlikely to see much stimulus, government omits mention of growth target

BEIJING, July 31 (Reuters) – China’s factory activity unexpectedly contracted in July after recovering from COVID-19 lockdowns the previous month, as fresh outbreaks of the virus and a darkening global outlook weighed on the economy. demand, a survey showed on Sunday.

The official manufacturing Purchasing Managers’ Index (PMI) fell to 49.0 in July from 50.2 in June, the Office for National Statistics (NBS) said, below the 50-point mark that separates contraction from growth. and the lowest in three months.

Analysts polled by Reuters had expected a reading of 50.4.

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“The level of economic prosperity in China has fallen, the foundation for recovery still needs consolidation,” Zhao Qinghe, senior statistician at NBS, said in a statement on the NBS website.

Continued contraction in energy-intensive industries such as gasoline, coking coal and ferrous metals contributed more to the drop in July’s manufacturing PMI, it said.

The production and new orders sub-indices fell 3 points and about 2 points in July, respectively, while the employment sub-index fell 0.1 point.

Weak demand has limited the recovery, Bruce Pang, chief economist and head of research at Jones Lang Lasalle Inc, said in a research note. “Third-quarter growth may face greater challenges than expected as the recovery is slow and fragile,” he added.

The official non-manufacturing PMI in July fell to 53.8 from 54.7 in June. The official composite PMI, which includes manufacturing and services, fell to 52.5 from 54.1.

China’s economy barely grew in the second quarter amid widespread lockdowns, with top leaders recently signaling that its strict zero-COVID policy would remain a priority. read more

Policymakers are poised to miss their GDP growth target of “around 5.5%” for this year, state media reported after a high-level meeting of the ruling Communist Party. read more

Beijing’s decision to stop mentioning the target has dispelled speculation that the authorities would implement massive stimulus measures, as they have often done in previous recessions.

Capital Economics says policy easing, coupled with the ongoing threat of more lockdowns and weak consumer confidence, are likely to further prolong China’s economic recovery.

FAILED RECOVERY

After a rebound in June, the recovery in the world’s second-largest economy has faltered as COVID outbreaks led to tighter restrictions on activity in some cities, while the once-mighty real estate market has reeled from a crisis to another.

Chinese manufacturers continue to struggle with high commodity prices, which are eating into profit margins, as export prospects remain clouded by fears of a global recession.

The southern Chinese megacity of Shenzhen has vowed to “mobilize all resources” to curb a slowly spreading COVID outbreak, ordering strict testing and temperature checks, and closures of COVID-affected buildings. read more

The port city of Tianjin, home to factories linked to Boeing (PROHIBITION) and Volkswagen, and other areas tightened restrictions this month to combat new outbreaks. read more

According to World Economics, lockdown measures had some impact on 41% of Chinese companies in July, although its manufacturing business confidence index rose significantly from 50.2 in June to 51.7 in July.

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Information from Beijing Newsroom; Edited by William Mallard and Himani Sarkar

Our standards: The Thomson Reuters Trust Principles.

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