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.
HORMUZ ISSUE: The US president said he expected crude prices to drop at the end of the war, which he called a ‘minor excursion’ that could continue ‘for a little while’ The United Arab Emirates (UAE) and Kuwait started reducing oil production, as the near-closure of the crucial Strait of Hormuz ripples through energy markets and affects global supply. Abu Dhabi National Oil Co (ADNOC) is “managing offshore production levels to address storage requirements,” the company said in a statement, without giving details. Kuwait Petroleum Corp said it was lowering production at its oil fields and refineries after “Iranian threats against safe passage of ships through the Strait of Hormuz.” The war in the Middle East has all but closed Hormuz, the narrow waterway linking the Persian Gulf to the open seas,
Nanya Technology Corp (南亞科技) yesterday said the DRAM supply crunch could extend through 2028, as the artificial intelligence (AI) boom has led the world’s major memory makers to dramatically reduce production of standard DRAM and allocate a significant portion of their capacity for high-bandwidth memory (HBM) chips. The most severe supply constraints would stretch to the first half of next year due to “very limited” increases in new DRAM capacity worldwide, Nanya Technology president Lee Pei-ing (李培瑛) told a news briefing. The company plans to increase monthly 12-inch wafer capacity to 20,000 in the first half of 2028 after a
Taiwan has enough crude oil reserves for more than 100 days and sufficient natural gas reserves for more than 11 days, both above the regulatory safety requirement, Minister of Economic Affairs Kung Ming-hsin (龔明鑫) said yesterday, adding that the government would prioritize domestic price stability as conflicts in the Middle East continue. Overall, energy supply for this month is secure, and the government is continuing efforts to ensure sufficient supply for next month, Kung told reporters after meeting with representatives from business groups at the ministry in Taipei. The ministry has been holding daily cross-ministry meetings at the Executive Yuan to ensure
RATIONING: The proposal would give the Trump administration ample leverage to negotiate investments in the US as it decides how many chips to give each country US officials are debating a new regulatory framework for exporting artificial intelligence (AI) chips and are considering requiring foreign nations to invest in US AI data centers or security guarantees as a condition for granting exports of 200,000 chips or more, according to a document seen by Reuters. The rules are not yet final and could change. They would be the first attempt to regulate the flow of AI chips to US allies and partners since US President Donald Trump’s administration said it rescinded its predecessor’s so-called AI diffusion rules. Those rules sought to keep a significant amount of AI
RSS