China factory activity ekes out growth in Sept, weakening global demand weighs

BEIJING (Reuters) – China’s factory activity eked out growth in September, but a slowdown in services sector growth and a downbeat private manufacturing survey pointed to further cooling as the economy grapples with COVID-19 curbs and softening export demand.

The official manufacturing purchasing managers’ index beat expectations, helped by a series of recent easing measures, but the private Caixin survey showed factory activity contracting more quickly in September and the official survey showed a sharp slowdown in services sector activity growth.

China’s government has rolled out more than 50 policy measures since late May. But the data suggested the world’s second-largest economy, also grappling with a property crisis, was struggling to regain traction after narrowly avoiding contraction in the second quarter.

“The surveys suggest that China’s economy continued to lose momentum in September, with the global downturn weighing on exports and virus disruptions dealing a fresh blow to services activity,” Zichun Huang, an economist at Capital Economics, said in a note.

The official manufacturing purchasing managers’ index (PMI) rose to 50.1 in September from 49.4 in August, the National Bureau of Statistics (NBS) said on Friday.

It beat expectations for a reading of 49.6 in a Reuters poll of economists, and was above the 50-point mark that separates contraction from growth.

“With the basket of economic policies coming into effect and the impacts of heatwaves fading, the manufacturing sector has picked up, leading to the PMI return to expansionary territory,” said Zhao Qinghe, a senior statistician at the NBS, in a statement.

COVID outbreaks dragged down businesses in retail, aviation, accommodation and catering sharply, Zhao said, adding that agovernment-led infrastructure push accelerated construction activity.

The official survey showed growth in the services sector slowed sharply, with the non-manufacturing PMI falling to 50.6 in September from 52.6 in August. The official composite PMI, which includes manufacturing and services, fell to 50.9 from 51.7.

The private Caixin survey also released on Friday showed factory activity contracted at a sharper pace in September, with indexes for output, new orders and employment all declining due to weak demand. The Caixin survey typically covers smaller, export-oriented companies.

The releases come as the yuan has continued to fall even as China’s central bank recently raised the FX risk reserve ratio to 20% and sent verbal warnings against speculative yuan trading and heavy one-way bets on the currency.

The yuan fell to its weakest level since the global financial crisis of 2008 on Wednesday. Asian currencies generally are falling against a strengthening dollar, buoyed by an aggressive U.S. tightening cycle.

“Pressure on the yuan also means that the PBOC [the People’s Bank of China] is constrained in its ability to provide monetary support,” Huang added.

EXTERNAL DEMAND WEAKENS

The official manufacturing PMI survey showed the new export orders index dropping to 47.0 from 48.1 in August, a trend also reflected in the private Caixin survey. External demand has been hit by rising rates, high inflation and the war in Ukraine.

Stricter coronavirus measures in multiple cities including the tech hub of Shenzhen and mega city Chengdu contributed to falls in new orders and employment in the manufacturing sector, according to the official survey.

The reading is one of the last official economic indicators announced by China before the once-in-five years reshuffle at the ruling Communist Party Congress in mid-October.

Key questions centre on what happens afterwards and whether President Xi Jinping will take a reformist or conservative approach to economic management and the country’s tough zero-COVID policy.

With few signs China will significantly ease its zero-COVID policy soon, many analysts expect the economy to grow by just 3% this year. That would be the smallest growth since the 2.2% expansion in 2020, at the height of the COVID-19 pandemic, which was the slowest rate since 1976.

(Reporting by Ellen Zhang and Ryan Woo; Editing by Ana Nicolaci da Costa)

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