China’s factory activity contracted in September for first time since March 2020

China’s factory activities contracted in September for the first time since March 2020 mainly due to a slowdown in energy-intensive industries, while services sector bounced back as the recent Covid-19 flare-ups receded.

The official manufacturing purchasing managers’ index (PMI) declined to 49.6 last month from 50.1 in August, the lowest level since the start of the coronavirus pandemic in February 2020, showed data from the National Bureau of Statistics (NBS) on Thursday.

The figure was below the median estimate of a fall to 50 by analysts at a Bloomberg survey.

The sub-index for new orders slid 0.3 percentage points into negative territory at 49.3, while the sub-index for production fell 1.4 percentage point to 49.5, both marking the lowest level since March 2020.

The sub-index for new export orders fell by 0.5 percentage point to 46.2, remaining in the contractionary territory for the fifth consecutive month, while the gauge for imports slipped deeper into contraction, down by 1.5 percentage points to 46.8.

The sub-indexes for purchase prices of raw materials and factory-gate prices of products rose by 2.2 percentage points and 3 percentage points, respectively, to 63.5 and 56.4 last month, both hitting the highest levels in four months. The spread between the two indexes narrowed further to 7.1 percentage point from 12.2 percentage points in May.

Employment in the manufacturing sector remained under pressure, with the sub-index falling by 0.6 percentage point to 49.

Energy-intensive sectors including petroleum, coal and other fuel processing, chemical fibers and rubber, ferrous metallurgy posting readings below 45, said senior NBS statistician Zhao Qinghe.

The NBS noted that 12 of 21 surveyed sectors were in expansion territory in September, compared to 10 in August. Also, the majority of manufacturing sectors have expanded since August.

Prices for upstream energy, fuels and minerals are running high, as are those for downstream ferrous metallurgical products, Zhao said.

High-tech manufacturing continued to post gain with a reading of 54, picking up by 0.3 percentage point from August. 

Meanwhile, the official non-manufacturing PMI rose to 53.2 in September, improving sharply from 47.5 in the previous month. The pick-up was driven by a rise in the sub-index for services activities which rose from 45.2 to 52.4, while the sub-index for construction activities dropped to 57.5 from 60.5.

The non-manufacturing figure beat expectations in the Bloomberg survey, which had predicted a rise to 49.8, as activity in the railway transport, air transport, accommodation, catering, ecological protection and environmental control sectors all recovered having been impacted coronavirus outbreaks in August.

The composite PMI, which includes both manufacturing and services activity, rose to 51.7 in September from 48.9 in August.

“The manufacturing PMIs diverged this month. But the big picture is that industry was coming off the boil even prior to the latest power shortages. On a more upbeat note, the official surveys point to a sharp rebound in services activity, which is probably enough to ensure that overall economic output picked up this month, partially reversing a sharp decline in August,” according to Capital Economics.

“The surveys took place prior to most of the hit to industrial activity from the latest power shortages. Since then, power shortages have intensified – anecdotal reports suggest that factories in more than 20 provinces have had to scale back production in response. We’ll have to wait for the hard data due in the coming weeks to see the full impact of these disruptions.”

On Tuesday, data confirmed that profits at China’s industrial firms grew at a weaker pace in August from a year earlier, slowing for a sixth consecutive month, as manufacturers struggled with high commodity prices, the coronavirus and shortages in some key components.

On the same day, the Caixin/Markit manufacturing PMI rose to 50.0 in September, from 49.2 in August, above the exceptions in the Bloomberg survey which had predicted a rise to 49.5.

“Conditions in the manufacturing sector picked up in September from the previous month, though the improvement was limited. The Caixin China manufacturing PMI came in at 50, indicating the downward pressure on the economy was still high,” said Wang Zhe, senior economist at Caixin Insight Group.

“On the one hand, the [coronavirus] continued to impact demand, supply, and circulation in the manufacturing sector. The state of the [coronavirus] overseas and the shortage of shipping capacity also dragged down total demand. [Coronavirus] control measures have clearly impacted the logistics industry.”

Momentum in the world’s second-biggest economy has weakened in recent months, with the latest power cuts adding further pressures to the manufacturing sector.

This week, Goldman Sachs lowered their economic growth forecast for China this year to 7.8 per cent from 8.2 per cent, citing recent sharp cuts to production in a range of energy-intensive industries.