Activity in China’s vast factory sector contracted last month for the first time since the COVID-19 pandemic began, the latest sign of deceleration in the world’s second-largest economy.
The drop in the official manufacturing purchasing managers’ index below 50, which signals a decline in output, shows the damage a widespread electricity crunch is having on growth.
Alongside tough measures to rein in the property market, the latest developments have led economists to pare back full-year growth predictions below 8 percent and warn that Beijing could be willing to tolerate a sharper slowdown as it tries to reform its economic model.
Photo: AFP
The problem for the economy is that manufacturing and property investment have been the main drivers of growth since the pandemic hit, while consumption growth remains relatively weak with households still cautious about travel and eating out.
Property curbs and electricity shortages, which have caused power cuts across China this week, were “a double whammy on the key drivers of growth this year,” said Bo Zhuang, China economist at Loomis Sayles Investments Asia. “A further growth slowdown is inevitable.”
Beijing is focused on preventing instability. The central bank told financial institutions that to prevent fallout from the property slowdown, which has exacerbated a debt crisis at China Evergrande Group (恆大集團), targeted financial easing aimed at the manufacturing sector might be likely.
However, economists see little prospect of relaxation on tough policy, such as curbs on housing purchases and energy use limits, until December, when Chinese President Xi Jinping (習近平) and top officials meet to set economic priorities.
“Additional policy support will need to come soon to avert a sharp deceleration in growth. The economy’s near-term outlook is highly challenging and uncertain. Headwinds include softening external demand, continued virus risks and a lack of fast, ready solutions for the energy shortages. Regulatory tightening is also a significant drag,” Bloomberg Economics said.
When the government set its growth target at “above 6 percent” in March, economists saw it as modest against their own predictions of greater than 8 percent. Many are now rethinking their views, with major banks from Goldman Sachs Group Inc to Nomura Holdings Ltd downgrading their forecasts in recent weeks to as low as 7.7 percent.
Chinese factories in 21 provinces have been hit by power cuts in the past few weeks, largely driven by a spike in coal prices that made it unprofitable for power plants to sell electricity at fixed prices. The brunt of the effect was in the official manufacturing purchasing managers’ index, which declined to 49.6 from 50.1 in August, below the 50 median estimate in a Bloomberg survey of economists.
Beijing has scrambled to solve the problem by allowing power companies to raise prices and funneling more coal to the sector. Those efforts could get production going again in many factories, but that relief might not come for weeks.
Beyond that, Beijing is signaling that it wants highly energy-intensive producers, like steel and chemical factories, to reduce output for the rest of the year, as it tries to meet environmental targets. China’s aim to reduce energy intensity, or how much power is needed to drive output, by about 3 percent this year could drag down full-year growth by 0.3 to 0.6 percentage points, said Ming Ming (明明), head of fixed income research at Citic Securities Co.
A rollback of energy intensity targets before the end of the year is unlikely, said Chen Long (陳龍), a partner at consulting firm Plenum.
Huawei Technologies Co (華為) largely omitted mention of its controversial Mate 60 smartphone series at a grand showcase of its new consumer products yesterday. The Shenzhen-based company would increase smartphone production in response to demand, said consumer division chief Richard Yu (余承東), without naming the handset triggering that surge. The Mate 60 Pro earned international notoriety with its advanced made-in-China processor last month, causing concern in Washington about Huawei’s progress toward developing in-house chipmaking capabilities despite US trade curbs. Huawei’s new phones have fired up the company’s sales and were among the top sellers in China in the week before Apple Inc’s
SLUMP: The electronics, machinery and traditional industries posted the largest decline in the past year; overall, sectors showed gains over the previous month Taiwan’s industrial production index decreased 10.53 percent year-on-year to 91.38 last month, falling for a 15th consecutive month on an annual basis, as weak global economic growth continued to weigh on end-market demand and investment momentum, the Ministry of Economic Affairs said on Saturday. The industrial production index gauges output in Taiwan’s four main industries: manufacturing, electricity and gas supply, water supply, and mining and quarrying. Last month’s decline was the smallest contraction since March when the index dropped 16.03 percent from a year earlier. On a monthly basis, the index rose 7.28 percent, marking a second straight month of improvement,
SHOPPING SPREE: The wholesale sector has lagged behind as consumer goods spending has risen, with food and beverage spending hitting almost NT$90 billion Sales in the retail, and food and beverage sectors last month continued to rise, increasing 4.3 percent and 14.3 percent respectively from a year earlier, while sales in the wholesale sector fell for a 10th straight month and declined 5 percent annually, the Ministry of Economic Affairs said on Saturday. The ministry forecast that retail, and food and beverage sales would retain growth momentum this month due to the opening of new shopping malls and the Mid-Autumn Festival. However, the wholesale sector is predicted to see sales drop for another month on an annual basis, as end-market demand remains weak and inventory
Investors were hoping to hear central banks finally signal last week that they were close to finishing raising interest rates in their battle against inflation. Instead, policymakers indicated that high rates are here for a while yet, with more hikes on the cards and few if any cuts in the near future. The US Federal Reserve set the tone on Wednesday when it paused its rate-hike campaign, but caused a stir by leaving the door open to another increase before the end of the year. France’s central bank also unsettled investors by saying that only two cuts were expected next year instead of
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