Wed. Oct 27th, 2021

The manufacturing industry in China has undergone its first official contraction since the onset of the coronavirus pandemic, as widespread power shortages have caused a loss of momentum in the country’s economy.

The index of manufacturing purchasing managers in China, an official measure of manufacturing activity, was 49.6 in September, falling below the 50-point threshold that separates the monthly contraction from expansion for the first time since February last year.

The PMI figures are one of the clearest signs of weakness in the Chinese economy yet, as it is facing severe power shortages, a slowdown in its large real estate sector and sporadic outbreaks of the highly contagious Delta variant of Covid-19.

China’s rapid recovery from the pandemic last year this means that it is performing better than other large economies. But this week, economists contributed to a recent wave of downgrades as a deteriorating power outage exacerbated a variety of pressures.

Zhiwei Zhang, chief economist at Pinpoint Asset Management, said the weak PMI data should alert the government. “Economic growth in the fourth quarter is likely to slow further without changing government policy, and the pace of slowdown could increase,” he added.

Goldman Sachs cut China’s growth forecast for 2021 to 7.8 percent from 8.2 percent, citing ‘significant downside’ of energy shortages.

The shortage, which increased the price of coal, arose due to high industrial production and environmental targets of the government. Nomura also reduced its full-year forecast and now expects growth of 7.7 percent.

Ting Lu, China’s chief economist at Nomura, noted this week that the power issues may have been ‘underestimated’ because of the market’s attention to the plight of Evergrande, the heavily indebted property developer who missed payments on his foreign debt last week.

“The power supply shock in the second largest economy in the world and the largest producer will hint at the world markets and have an impact,” he said, adding that it was “very likely” to cause a shortage of goods for Thanksgiving and Christmas.

The PMI of Caixin China General Manufacturing, a private index that places greater emphasis on smaller, non-state-owned enterprises, had already contracted in August for the first time since April 2020.

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In September, it returned to exactly 50, as stronger domestic demand led to a shortage of exports and production. The Caixin survey takes place earlier this month than its official counterpart.

While sporadic outbreaks of the virus announced the return of restrictions to parts of China in September, the restrictions were less severe and widespread than in previous months, when they had a major impact on travel and consumer activities.

The relaxed restrictions have helped the official non-manufacturing PMI, which largely follows services, come to a surprise. The metric reached 53.2 after a contraction last month when it dropped to 47.5.

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