China’s factory outlook eases again, services shrink

Photographer: Qilai Shen / Bloomberg

An official indicator of China’s industrial production fell for the second month in January, while activity in the services sector slowed to the lowest reading since March.

• The official index of manufacturing purchasing managers dropped to 51.3 from 51.9 in December, according to data released on Sunday by the National Bureau of Statistics.
• The non-manufacturing indicator dropped to 52.4 from 55.7 in January. That was the biggest drop since February last year, when China was blocked to contain Covid-19. Readings above 50 indicate expansion of production in relation to the previous month.

Key insights

• China’s recovery from the pandemic accelerated in late 2020, fueled by an export boom in medical and electronic products.
• Economists had expected some weakness in PMI ahead of the Lunar New Year holiday in February. In addition to a seasonal drop in production, strict travel restrictions and virus control measures following the recent Covid-19 outbreaks in China mean that many workers will not make the annual trip home, which is likely to result in lower spending with gifts and dinners outside.
• “These measures will hamper the recovery in the service sector, especially in the hospitality sector,” wrote economists at Nomura Holdings Inc. led by Lu Ting in a report before the data was released. However, they “can provide a small boost to industrial production and construction in southern China, as workers would remain in the workplace”.
• In general, the new control measures will hurt economic growth in the first quarter, they wrote.

Take more

• A sub-index of new export orders to factories dropped to 50.2, while one for new orders dropped to 52.3
• An industrial employment sub-index fell to 48.4, while non-industrial employment slowed to 47.8

– With the help of James Mayger and Lin Zhu

(Updates with graph, comments from economists and more details everywhere.)