China factory activity contracts in April as recovery challenges loom

China’s manufacturing activity contracted in April, official figures showed on Sunday, due to tapering global demand and slow domestic recovery after Covid-related curbs were lifted.

The official manufacturing purchasing managers’ index (PMI) -- a key gauge of Chinese factory output -- fell unexpectedly to 49.2 in April from 51.9 in March, and below the 50-point mark that separates expansion and contraction in activity, data from the National Bureau of Statistics (NBS) showed.

Analysts polled by Bloomberg News had expected April factory activity of 51.4.

The drop comes after February recorded the highest reading in more than a decade as factories returned to normal following a surge in Covid cases.

China’s economy grew 4.5 per cent in the first three months of the year as the country reopened after dropping strict health controls that helped keep the coronavirus in check but battered businesses and supply chains.

But the world’s second-largest economy is also beset by a series of other crises, from a debt-laden property sector to flagging consumer confidence, global inflation, the threat of recession elsewhere and geopolitical tensions with the United States.

The official non-manufacturing PMI, which measures growth in the services and construction sectors, fell to 56.4 from 58.2 in March.

The March reading was the highest since May 2011, as the country saw a surge in demand for travel, entertainment and other leisure services unavailable for nearly three years during the pandemic.

The government has set a comparatively modest growth target of around five per cent this year, a goal Premier Li Qiang has warned could be hard to achieve.

The Communist Party’s top policy-making body said in a statement Friday that the economy still faced headwinds from weak demand at home and the slow pace of reforms.

“China’s economy is mainly in the process of recovering, with (internal) driving forces still weak and demand insufficient,” the Politburo said, according to a report by state-run Xinhua News Agency.

“Economic transition and upgrading face new headwinds, and hardships... are still to be overcome to promote high-quality development.”

Travel rush: Beijing has promised further state support for the private sector, which is still reeling from a regulatory crackdown on the property, technology and private education industries.

Policymakers are also looking for ways to push up domestic demand, as China’s export and manufacturing sectors struggle amid tepid global demand.

One bright spot in recent months has been households spending piled-up savings on travel.

Bookings for air and train tickets and hotel reservations for the five-day labour Day holiday starting Saturday all surpassed the levels recorded in the same period in 2019, before the pandemic hit, according to online Chinese travel agency Fliggy.

“China’s service sector continues to grow strongly while the manufacturing sector shows signs of weakening,” Zhang Zhiwei, chief economist at Pinpoint Asset Management, said.

“These mixed signals will likely keep the pressure on the government to continue its supportive fiscal and monetary policies in the second quarter,” he said.

Earlier, China’s industrial firms’ profits shrank at a slightly slower pace in January-March but the decline remained in the double-digits as the economy struggled to fully recover despite the country’s exit from its zero-COVID policy.

Profits at these firms fell 21.4% in the first three months from a year earlier, cumulative data released by the statistics bureau showed on Thursday, as the factory sector remained underpowered by the crippling pandemic.

The narrower profit decline in the fist three months was in part due to a notable improvement in equipment manufacturing firms’ profits, NBS statistician Sun Xiao said.

Sun cited the automobile manufacturing sector, which saw profits rising by 9.1% in March, recovering part of the 41.7% plunge in the January-February period, as production and sales picked up amid a revival in market demand.

Industrial firms’ profits will likely return to growth in the second half of the year, Luo Huanjie, senior researcher at the Zhixin Investment Research Institute, said in a note to clients.