China's factory activity contracts unexpectedly in July amid Covid flare-ups

Summary:

• China July official manufacturing PMI lower than forecast
• July official services PMI grows at slower pace
• Covid flare-ups, cooling global demand, property key risks
• Big stimulus seen unlikely, govt omits mention of growth goal

China's factory activity contracted unexpectedly in July after bouncing back from Covid-19 lockdowns in the prior month, as fresh virus flare-ups and a darkening global outlook weighed on demand, an official survey showed on Sunday.

The official manufacturing purchasing managers' Index (PMI) stood at 49 in July, down from 50.2 in June, the National Bureau of Statistics (NBS) said on Sunday.

Analysts polled by Reuters had expected it to improve to 50.4, a marginal improvement but still above the 50-point mark that separates contraction from growth on a monthly basis.

The official non-manufacturing PMI in July fell to 53.8 from 54.7 in June. The official composite PMI, which includes both manufacturing and services activity, was at 52.5 versus 54.1.

China's economy nearly contracted in the second quarter amid widespread lockdowns but top leaders recently signalled that a strict zero-Covid policy would remain a top priority.

Policymakers are prepared to miss their GDP target of "around 5.5%" for this year, state media reported after a high-level meeting of the ruling Communist Party. 

Beijing's decision to drop mention of the growth target after the meeting has doused speculation it will roll out massive stimulus measures, as it often did in past downturns.

Capital Economics says that policy restraint, along with the constant threat of more lockdowns and weak consumer confidence, is likely to make China's economic recovery more drawn-out.

Faltering recovery

After a rebound in June, the recovery in the world's second-biggest economy has faltered as nascent Covid flare-ups led to tightening curbs on activity in some cities, while the once mighty property market lurches from crisis to crisis.

Chinese manufacturers are also still wrestling with high raw material prices which are squeezing profit margins, and the export outlook is being clouded by fears of a global recession.

China's southern megacity of Shenzhen has vowed to "mobilise all resources" to curb a slowly spreading Covid outbreak, ordering strict implementation of testing and temperature checks, and lockdowns for Covid-hit buildings. 

Earlier this month, the port city of Tianjin, home to factories linked to Boeing BA.N and Volkswagen VOWG.DE, and other areas tightened curbs to fight new outbreaks.

According to World Economics, the lockdown measures had some impact on 41% of Chinese companies in July, though its index of manufacturing business confidence rose significantly from 50.2 in June to 51.7 in July.