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China’s Economy Worsens as Covid-19 Confusion and Unrest Ripple Nationwide

The official manufacturing purchasing managers’ index (PMI) dropped to 48.0 this month from 49.2 in October.

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China’s economy is showing further signs of weakness in several areas, new data show, amid a crisis of nationwide protests and confusion surrounding its controversial Covid-19 containment policy.

Measurements for the country’s factory output and its services industry both worsened in November, according to a report released Wednesday by China’s National Bureau of Statistics (NBS).

The official manufacturing purchasing managers’ index (
) dropped to 48.0 this month from 49.2 in October. The non-manufacturing PMI—a general gauge of service-sector activity—tumbled further, to 46.7 from 48.7.

A reading of 50 separates contraction from expansion. Both declines marked the lowest levels in seven months and both fell short of economists’ forecasts.

The particularly bad services industry performance was dragged down by the road and air transportation, accommodation, restaurants and catering, and sports and entertainment subsectors, the readings for which all came in below 38.0%.

In an editorial accompanying the data, Zhao Qinghe, a senior statistician at the NBS, blamed “domestic epidemics spreading widely and swiftly, and the international environment becoming more complex and severe.”

The dour data follow equally bad numbers last week on corporate profits, which overall fell 3% from January to October compared with the same period last year. Profits were weakest for foreign firms, which plummeted 7.6%, and for private enterprises, which dropped 8.1%, according to the NBS.

The economic woes come during extraordinarily turbulent times in China. Its rigid zero-Covid policy—which includes swift quarantines, mass testing, and tight border controls—have decimated business activity by interrupting supply-chains, shuttering stores, and crushing consumer demand.

“The problem with China’s ‘dynamic zero-Covid’ is, by definition, it’s dynamic—constantly changing without predictability, leading to abrupt decision-making. People need certainty in their lives and not haphazard lockdowns, lockouts, school closures, business suspensions, and travel restrictions ad nauseam,” James Zimmerman, a partner in the Beijing office of Perkins Coie and former chairman of the American Chamber of Commerce in China, told Barron’s.

In early November, China said it would be loosening such measures—an announcement that reversed a year-long bear run for its stock markets. But daily cases began to shoot up, culminating Sunday in the highest level of new infections since the pandemic began in the country. This halted the expected relaxation of Covid-19 restrictions.

The continuing control of citizens’ daily lives sparked unrest that boiled over into nationwide protests this weekend that were of a scale and intensity not seen since those of Tiananmen Square in 1989.

“It is not a surprise that the official PMI readings registered contractions in almost all subindexes amid Covid woes. Disrupted production, sluggish domestic demand, and job market pressure remain the recurring headaches amid Covid case upticks,” Bruce Pang, head of research and chief economist for Greater China at Hong Kong-based
Jones Lang LaSalle
(JLL), said in an emailed statement.

Consultancy China Beige Book on Wednesday released a separate analysis of November’s economic performance, coming to equally pessimistic conclusions.

“Every key business performance indicator deteriorated, and no sector saw better results in November, as exports weakened and domestic consumption stalled. Every sector is currently trending toward double-digit year-over-year growth declines, putting true 2022 GDP growth laughably out of the government’s target range,” it wrote in its monthly Flash Data report.

It added the worst may be yet to come, as policy makers sit between a rock and a hard place. Their choices are to “absorb skyrocketing Covid case counts or remain unable to functionally open the economy.”

Exacerbating services and consumption have been China’s stimulus efforts on the supply side, such as infrastructure, rather than boosting the demand side, Peking University finance professor Michael Pettis told Barron’s.

Flight activity, as well, has tumbled over the past two months, according to recent data from airline analysis firm VariFlight. After a midyear rebound, recent flight activity has sunk back to nearly a third of its pre-pandemic levels.

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