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China's Manufacturing Activity Contracts Sharply Amid COVID Surge

China's factory activity contracted for the third month in December, experiencing the sharpest decline in nearly three years as the country saw a surge in COVID infections.

Chinese Person in Airport
Chinese Person in Airport

The official purchasing managers' index (PMI) fell to 47.0, down from 48.0 in November, according to the National Bureau of Statistics (NBS). This drop was the largest since the pandemic began in February 2020.

The decline in PMI can be attributed to the removal of strict COVID restrictions in early December, which likely led to a rise in cumulative infections to 18.6 million in December, as estimated by UK-based health data firm Airfinity. The surge in conditions has caused temporary labor shortages and disrupted supply chains. In response, Tesla plans to run a reduced production schedule at its Shanghai plant in January, extending the reduced output that began this month.

In addition to the impact of COVID, weakening external demand due to growing global recession fears, rising interest rates, and inflation, as well as the conflict in Ukraine, may further slow China's exports and harm its manufacturing sector. This could hinder the country's economic recovery.

According to the NBS, 56.3% of surveyed manufacturers reported being significantly affected by the epidemic in December, an increase of 15.5 percentage points from the previous month. While most manufacturers expect the situation to improve gradually, the non-manufacturing PMI, which measures service sector activity, fell to 41.6 in December, marking the lowest reading since February 2020. The official composite PMI, which combines manufacturing and services, declined to 42.6.

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This week, China's banking and insurance regulator pledged to increase financial support for small and private businesses in the catering and tourism sectors that the COVID-19 epidemic has hard hit. The regulator emphasized that a consumption recovery will be a priority.