Coronavirus: cost to China’s economy may be larger than Beijing hopes as February manufacturing and service sectors plunge

Purchasing managers’ indexes for both manufacturing and service sectors drop to all-time lows
Steep falls raise questions over extent of damage epidemic has caused to China’s economy and how long it will take the country to recover

Many Chinese factories have faced a labour shortage as migrants have been unable to return to work because of the coronavirus outbreak. Photo: AFP

The damage caused by the coronavirus outbreak to China’s US$14 trillion economy could be much worse than Beijing hoped, as official measures for the country’s factory and service activity indicated on Saturday, threatening President Xi Jinping’s vision for 2020 and underscoring his urgent appeal to get production back to normal.

Monthly economic indicators for February sank to all-time lows as the coronavirus halted China’s manufacturing machine and froze activity in the service sector – from retailing to recycling – painting a bleak picture of the world’s second-biggest economy and challenging Beijing’s repeated assurance that the impact would be manageable and short-lived.

Covid-19, the disease caused by the coronavirus – was first reported in Wuhan in December. Since then it has spread to more than 50 countries and more than 85,000 people have been infected. The outbreak has disrupted travel and cargo shipments, and caused stock markets to slump.

China’s official February purchasing managers’ indexes (PMI) for both manufacturing and services, released by the National Bureau of Statistics on Saturday, confirmed fears that China’s economy was in bad shape and fanned speculation that it may even contract in the first quarter.

Larry Hu, chief China economist at Macquarie Capital in Hong Kong, said in a note that Beijing might report negative growth for “the first time since the Cultural Revolution”.

The manufacturing PMI, which measures factory activity, dropped to 35.7 in February – below the previous all-time low of 38.8 set in November 2008 during the global financial crisis – from 50 in January when the impact of the epidemic was not apparent.

A reading below 50 indicates a contraction in activity.

The February PMI figures confirmed fears that China’s economy was in bad shape. Photo: AFP

All of the sub-indexes of the PMI pointed to the difficult situation facing Chinese factories. Output plummeted, new orders vanished, exports and imports stopped, and logistics were badly disrupted. Input prices, which reflects the costs factories must pay, was the only sub-index that remained above 50.

The non-manufacturing PMI – a gauge of sentiment in the services and construction sectors – also dropped, to 29.6 from 54.1 in January. This was also the lowest on record, beating the previous low of 49.7 in November 2011, according to the China Federation of Logistics and Purchasing, which produces the index with the National Bureau of Statistics.

The declines in the February reflect the difficulties businesses are having in bringing production back online due to shortages of labour as well as difficulties receiving supplies or shipping goods to market because of transport restrictions enacted to contain the spread of the virus.

An extended slump would put upwards pressure on unemployment, especially among small, private sector service firms. Beijing, which worries that rising joblessness could cause social unrest, has called on local governments to remove unnecessary restrictions to get businesses back to work.

The employment sub-index in the manufacturing PMI fell to 31.8 in February.

“It is not because factories have stopped hiring migrant workers, it is because the flow of migrant workers to factories has been blocked,” said Hua Changchun, an analyst at brokerage Guotai Junan Securities. “There’s no point talking about resuming production if workers can’t return to their jobs.”

Zhang Qiqun, a researcher with the Development Research Centre of State Council, said in a statement that the major economic indicators for this quarter would see “obvious drops” and China must “be prepared”.

The employment sub-index in the manufacturing PMI fell to 31.8 in February. Photo: AFP

How quickly China can dig itself out of the coronavirus hole is a matter of debate.

According to the PMI survey, about 90 per cent of medium and large-sized manufacturers are expected to resume production in March, meaning about 10 per cent will still be closed four weeks from now.

As for small firms, the industry ministry said this week that two-thirds would still be closed at the end of February.

China’s production difficulties have resulted in economic problems for nations around the world that rely on supply chains that begin or pass through the country. The global spread of the coronavirus will only exacerbate the problem.

Barclays and Nomura forecast China’s first-quarter growth at 2 per cent, while Capital Economics said it would contract in year-on-year terms.

“The sharp drop in China’s manufacturing PMI in February reinforces our view that the normalisation in economic activity will be delayed,” said Xing Zhaopeng, an economist at Australia & New Zealand Banking Group.

“There’s scant chance for a V-shaped rebound – the authorities are using targeted aids more than stimulus to stabilise the economy and that will lead to a gradual bounce.”

The National Bureau of Statistics tried to put a brave face on the data, saying there would be a substantial improvement in March.

“The resumption of work is ramping up and market confidence is steadily recovering,” said Zhao Qinghe, a senior statistician at the NBS.

“Although the novel coronavirus pneumonia epidemic has caused a larger impact on production and operations of Chinese enterprises … currently the epidemic has come under initial containment, and the negative impact on production is gradually weakening.”

Source: SCMP

Posted on 29/02/2020 at 11:08 in Beijing, China Federation of Logistics and Purchasing, China’s economy, coronavirus, cost, COVID-19, Cultural Revolution, Development Research Centre, Hong Kong, larger, manufacturing and service sectors, national bureau of statistics, plunge, purchasing managers’ indexes (PMI), State Council, Uncategorized | RSS feed | Reply | Trackback URL

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