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Factory activity in China is contracting at a faster rate in April as a result of the lockdowns

The widespread COVID-19 lockdowns interrupted industrial output and disrupted supply networks in April, increasing worries of a dramatic economic downturn in the second quarter, which will weigh on global GDP.

The official manufacturing Purchasing Managers’ Index (PMI) dipped to 47.4 in April from 49.5 in March, the National Bureau of Statistics (NBS) reported on Saturday, marking the second consecutive month of decline. That was the lowest it had been since February 2020.

According to a Reuters survey, the PMI was projected to fall to 48, well below the 50-point threshold that distinguishes monthly contraction from expansion. The headline PMI number, paired with an even greater constriction in services, provided the first indications of an economy battered by escalating COVID regulations, such as a protracted suspension of Shanghai’s commercial center.

According to a Caixin poll of private businesses, factory activity fell at its fastest rate in 26 months, with the new export orders indicator falling to its lowest level since June 2020, indicating a deterioration in one of the economy’s few bright spots. COVID problems, according to the statistics office, were connected to a considerable drop in both demand and supply in the industrial sector.

Due to a rigorous COVID policy, many large Chinese cities are said to be under complete or partial lockdown. With hundreds of millions of people stranded at home, spending is suffering, forcing many economists to lower growth projections for the world’s second-largest economy. According to the NBS, the output sub-index decreased to 44.4 in April from 49.5 a month earlier, while new orders fell to 42.6 from 48.8 in March.

After announcing last week that shutdowns at its Shanghai facility had lost nearly a month of build volume, electric vehicle company Tesla has warned of a temporary decrease in production as a result of China’s restrictions. Some experts are even predicting an increase in recession risks, claiming that authorities would need to give additional stimulus to meet the stated growth target of 5.5 percent in 2022.

Apart from COVID restrictions and the increased dangers posed by the Ukraine conflict, researchers warn that stubbornly low spending and a prolonged housing market downturn are also dragging on GDP.

In a politically charged year, authorities have promised greater assistance to boost confidence and prevent future job losses. The Politburo, the ruling Communist Party’s highest decision-making body, has stated that China will provide policy assistance, providing some relief to damaged stock markets. Analysts believe their mission would be made more difficult until China relaxes its zero-COVID policy, which it has shown little willingness to do.

Traditional policy instruments like interest rate reduction and bigger liquidity injections, according to economists, may have little influence if lockdowns paralyze activity. President Xi Jinping presided over a conference of top officials this week that announced a major infrastructure push to raise demand, reiterating Beijing’s preference for large-scale projects to support GDP. However, such projects take time, and Beijing is leery of another large stimulus program like the 4 trillion yuan ($605.82 billion) it spent during the global financial crisis in 2008 and 2009, which resulted in a debt mountain.

A hasty shift to more aggressive easing might result in additional capital outflows, causing authorities more issues. China’s yuan currency dropped more than 4% in April, the worst in 28 years, while stock markets have been the second-worst performers this year, after only sanctions-hit Russia. China’s GDP increased 4.8 percent year on year in the first quarter, topping experts’ projections of 4.4 percent growth. However, March statistics showed a significant drop in retail sales and the worst unemployment rate since May 2020.

In April, a sub-index of building activity, which Beijing believed would help boost growth this year, fell to 52.7 from 58.1 in March. Caterpillar Inc, a manufacturer of construction equipment, warned on Thursday that demand for excavators in China, one of its main markets, may fall below pre-pandemic levels by 2022. Lockdowns have harmed the revenues of corporations like General Electric and 3M.

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