China’s economic recovery loses steam as factory production contracts further

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Hong Kong (CNN) — Factory activity in China has slumped to its weakest level since the country ended its zero-Covid policy in December, as its economic recovery continues to lose steam.

Asian markets tumbled following the release of the May data, even as a tentative agreement brokered by US President Joe Biden and House Speaker Kevin McCarthy to raise the US debt ceiling cleared a key hurdle on Tuesday evening.

China’s official manufacturing Purchasing Managers’ Index (PMI) dropped to 48.8 this month, down from 49.2 in April, according to data released by the National Bureau of Statistics on Wednesday. It was the second contraction in as many months. A reading above 50 indicates expansion, while anything below that level shows contraction.

The index, which mainly covers larger businesses and state-owned companies, was at its lowest level since December. Beijing scrapped most of its pandemic restrictions early that month, effectively ending its three-year-long zero-Covid policy.

The official non-manufacturing PMI, which measures sentiment in services and construction sectors, decreased to 54.5 in May from April’s 56.4, also the weakest level in four months.

“The economic recovery faces challenge[s],” Zhiwei Zhang, president and chief economist for Pinpoint Asset Management, said Wednesday. “Domestic demand weakened recently, partly due to [the] cooling property market and the second wave of Covid.”

The world’s second largest economy is still in the midst of a historic downturn in the property market. The country is also gearing up for a fresh wave of Covid-19.

Last week, Zhong Nanshan, a prominent Chinese epidemiologist, predicted that the current second wave of Covid infections would peak at the end of June with around 65 million people infected per week. Doctors in Beijing have told state media that the proportion of serious complications was low, as was the hospitalization rate.

Bearish sentiment

Zhang said external demand for Chinese goods was not supportive of economic recovery, as the United States faces the risk of recession. Recent data showed that China’s exports grew 8.5% in April, down sharply from 14.8% in March, indicating global demand was slowing.

“The sentiment in the financial market is quite bearish,” he said.

Hong Kong stocks fell in response to China’s manufacturing and services data. The Hang Seng Index fell 2.4% and is poised for its biggest drop in more than two months. It’s the worst performer so far on Wednesday among major indexes in the region.

Japan’s Nikkei 225 (N225) also lost 1.1%. China’s Shanghai Composite Index shed 0.7%. South Korea’s Kospi, meanwhile, erased early gains and edged down 0.2%.

The Chinese yuan, a barometer of investor sentiment, weakened against the US dollar.

The offshore yuan currently traded at 7.117 per dollar, down 0.4%. The onshore rate also dropped 0.4% versus the greenback.

China’s economy experienced an initial burst of activity following the abrupt lifting of pandemic restrictions last year. In the first quarter of this year, GDP expanded 4.5% from a year ago, beating the estimate of 4% growth from a Reuters poll of economists.

But momentum has slowed recently, as retail sales, industrial output and investment for April all missed forecasts by economists. The official manufacturing PMI unexpectedly shrank last month, snapping a three-month streak of expansion in the sector. Activity in the services industry also started cooling down in April.

Deflationary pressure has worsened as consumer prices barely moved during the past few months. Another major concern is the soaring unemployment rate for young people, which hit a record level of 20.4% in April.

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