China shrinks production activity by overcoming power shortages

Manufacturing activity in China has suffered its first formal contraction since the start of the coronavirus epidemic as the massive power crisis has accelerated across the country’s economy.

China’s manufacturing purchasing managers’ index, the official measure of factory activity, was .6..6 in September, falling below the 50-point mark for the first time since February last year, separating the monthly contraction from the expansion.

PMI figures are one of the most obvious signs of weakness across China’s economy because of severe power shortages, a slump in its vast property sector and a sporadic outbreak of the highly contagious delta variant of Covid-1.

China’s rapid recovery from the epidemic last year means it has performed better than any other major economy. But economists this week added a lower wave of recent growth as the growing power crisis adds to the pressure.

Zhiwei Zhang, chief economist at Pinpoint Asset Management, said weak PMI data should be “dangerous” for the government. “Economic growth in the fourth quarter is likely to slow further without changing government policy and the pace of recession could accelerate,” he added.

Goldman Sachs on Tuesday downgraded China’s growth forecast for 2021 from .2.2 percent to 7. per cent, citing “significant negative pressures” from energy shortages.

Increased coal prices have led to shortages due to high industrial production and government environmental targets. Nomura has also cut its full-year forecast and is now expecting a 7.7 percent increase.

Ting Lu, chief economist at Nomura in China, noted this week that power problems could be “underestimated” because of the market’s focus on Evergrand’s fortunes, the heavily indebted property developer, which failed to pay off its offshore ts last week.

“The shock of the world’s second-largest economy and the largest manufacturer’s power supply will spread and affect global markets,” he said, adding that it would “most likely” create a shortage of goods for Thanksgiving and Christmas.

Caixin China General Manufacturing PMI, a private index with a strong emphasis on small, non-state businesses, was contracted in August for the first time since April 2020.

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In September, it returned to exactly 50, as strong domestic demand created for deficits in exports and production. The Caixin survey is earlier this month than its official counterpart.

Although sporadic outbreaks of the virus began to bring back lockdowns in some parts of China in September, the restrictions on their weight gain in travel and consumer activities were less severe and widespread than in previous months.

The relaxed bans have helped the official non-manufacturing PMI, which basically tracks services, in a surprising return. The metric hit 53.2 after the contraction last month when it dropped to 47.5.

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