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China’s factory activity unexpectedly falls in July as COVID flares up

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

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  • China July official manufacturing PMI below forecast
  • July official services PMI grows at a slower pace
  • COVID flare-up, cooling global demand, key property risks
  • A major stimulus is unlikely to appear, with the government not talking about a growth target

BEIJING, July 31 (Reuters) – China’s factory activity unexpectedly shrank in July after rebounding from COVID-19 lockdowns a month ago, as fresh virus flare-ups and a darkening global outlook weighed on 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 National Bureau of Statistics (NBS) said, falling below the 50-point mark that separates contraction from growth and a three-month low.

Analysts polled by Reuters had expected a reading of 50.4.

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“China’s economic prosperity has declined, and the foundation for recovery still needs consolidation,” NBS chief statistician Zhao Qinghe said in a statement on the NBS website.

It said continued contraction in energy-intensive industries such as oil, coking coal and ferrous metals contributed most to the decline in the July manufacturing PMI.

In July, the production and new orders sub-indices decreased by 3 points and about 2 points, respectively, while the employment sub-index decreased by 0.1 points.

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

Non-manufacturing PMI fell to 53.8 in July 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, and top leaders recently said a strict zero-COVID policy would remain a top priority. read more

After a high-level meeting of the ruling Communist Party, state media said politicians were prepared to miss the GDP growth target of “around 5.5%” for this year. read more

Beijing’s decision to decline to mention a target did away with speculation that the authorities would introduce massive stimulus measures, as has often been the case in previous recessions.

Capital Economics says policy restraint, along with the lingering threat of more lockdowns and weak consumer confidence, will make China’s economic recovery even more attractive.

HEALING RECOVERY

The recovery in the world’s second-largest economy has slowed after a rebound in June, as the outbreak of the COVID-19 led to curbs on activity in some cities, while the once-mighty property market lurched from crisis to crisis.

Chinese manufacturers continue to struggle with high raw material prices, which squeeze profit margins, as the export outlook remains clouded by fears of a global recession.

China’s southern megalopolis, Shenzhen, has vowed to “mobilize all resources” to contain the slow-spreading COVID outbreak, ordering rigorous testing and temperature checks and the lockdown of buildings hit by COVID-19. read more

The port city of Tianjin is home to factories associated with Boeing (BA.N) and curbs were tightened this month to combat new outbreaks in Volkswagen and other areas. read more

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

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Report by Beijing Newsroom; Edited by William Mallard and Himani Sarkar

Our standards: Thomson Reuters Trust Principles.

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