Chinese factory activity in August likely waned amid COVID outbreaks, housing slump: Reuters poll

FILE PHOTO: Employees work on the vehicle component production line during a government-organized media tour at a factory of German engineering group Voith, following the outbreak of the coronavirus disease (COVID -19), in Shanghai, China July 21, 2022. REUTERS/Aly Song/File Photo

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BEIJING, Aug 29 (Reuters) – Chinese factory activity likely contracted again in August, a Reuters poll showed on Monday, as COVID outbreaks and a struggling property sector dented demand while an electricity crisis in southwestern China hit production.

The official purchasing managers’ index (PMI) for the manufacturing sector is expected to have fallen to 49.2 in August from 49.0 in July, according to median forecasts from 23 economists polled by Reuters. Reversing previous gains in June, the gauge is expected to remain below the 50 point mark that separates contraction from growth.

China’s economy narrowly escaped contraction last quarter due to widespread COVID-19 lockdowns, and economists say its nascent recovery risks running out of steam amid new virus surges and a housing sector in trouble.

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“High-frequency indicators such as container throughput and steel demand data weakened further in August compared to July,” Goldman Sachs analysts said in a note on Friday, forecasting a decline to 48. ,8.

Stricter COVID restrictions in August as well as hot weather may also have affected outdoor construction activity due to extreme heat and led to a decline in the services PMI, they added.

Scorching heatwaves have swept across China’s vast Yangtze River basin since mid-July, pounding densely populated cities from Shanghai to Chengdu and forcing southwestern Sichuan province to halt industrial production to secure food residential electricity. Read more

According to ING’s Chinese economist, Iris Pang, the damage caused by the shortage of electricity due to the drought amounts to around 1% of GDP. The “most worrying” aspect of the Chinese economy, however, was the deleveraging reform of residential property developers,” she said.

The real estate sector, which accounts for around a quarter of China’s economy, has swung from crisis to crisis since the summer of 2020 following the intervention of regulators to reduce excessive debt, leading some developers to make defaulting on their debts and struggling to complete projects.

“Potential home buyers look to see if unfinished houses can be finished quickly and with good quality. It takes time – at least two quarters,” Pang said.

To prop up the struggling economy, the central government has proposed another set of stimulus measures, including increasing the quota on policy finance tools by 300 billion yuan ($43.39 billion). The central bank also cut the benchmark lending rate and lowered the mortgage benchmark by a larger margin.

The official manufacturing PMI, which largely focuses on large corporations and public companies, and its sister survey for the services sector, will be released on Wednesday.

The private-sector Caixin manufacturing PMI, which focuses more on smaller businesses and coastal regions, will be released on Thursday. Analysts expect an overall reading of 50.2 for that, down from 50.4 for July.

($1 = 6.9140 Chinese yuan renminbi)

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Reporting by Ellen Zhang and Ryan Woo; Poll by Devayani Sathyan; Editing by Stephen Coates

Our standards: The Thomson Reuters Trust Principles.

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