China’s factory activity shrinks amid Covid disruption

China’s factory activity unexpectedly shrank in July as sporadic Covid outbreaks disrupted the sector and the slowing global economy weighed on demand.

The official manufacturing purchasing managers’ index (PMI) fell to 49.0 in July from 50.2 in June, China’s National Bureau of Statistics said on Sunday. That was weaker than forecast, below the 50-point mark separating expansion from contraction.

Indexes tracking output and new orders fell during July, with the sharpest contraction in activity coming in energy-intensive industries, such as petrol, coking coal and ferrous metals.

“The level of economic prosperity in China has fallen; the foundation for recovery still needs consolidation,” the NBS senior statistician Zhao Qinghe said.

China has been hit by fresh Covid-19 outbreaks since lifting a two-month lockdown in Shanghai at the start of June. It imposed a lockdown in the city of Xi’an at the start of July, after cases of the Omicron subvariant, known as BA.5, were detected.

Shenzhen, home to many tech companies, has vowed to “mobilise all resources” to curb a slowly spreading Covid outbreak, including strict implementation of testing and temperature checks, and lockdowns for Covid-hit buildings.

The port city of Tianjin, which includes factories linked to Boeing and Volkswagen, has also been fighting clusters of Covid-19, and shut some entertainment venues and kindergartens and tutoring agencies in July.

Weak demand has also constrained China’s recovery, with supply chain disruption and high energy prices weighing on the global economy.

Bruce Pang, the chief economist and head of research at Jones Lang LaSalle, said the fall in China’s manufacturing PMI showed that its economic recovery was fragile, after GDP fell in the second quarter of the year.

“The challenges to China’s GDP growth in the third quarter could be bigger than expected earlier,” Pang said.

China’s non-manufacturing PMI, which tracks the construction and services sectors, decreased to 53.8 from 54.7 the previous month, showing slower growth in those parts of the economy.

China’s ruling Communist party effectively acknowledged last week that the economy will not hit its official 5.5% growth target this year. After a high-level leaders’ meeting, state media reported that China will try hard to achieve the best possible results for the economy this year.