Delta variant of Covid-19 hits Chinese economy as service sector contracts

The Chinese economy was hit by the delta virus outbreak in August, adding to signs of slower growth in the second half of the year and fueling speculation about increased central bank support.

Official surveys of purchasing managers showed the service sector contracted for the first time since February 2020 as consumers cut spending and travel amid new virus brakes. The manufacturing purchasing managers index edged down to 50.1 from 50.4 in July, in part due to supply chain disruptions.

Beyond virus outbreaks, China’s recovery is also showing signs of slowing down following recent regulatory crackdowns and weak domestic demand. The central bank has indicated it could provide more targeted support – such as reducing the reserve requirement ratio for some lenders – while the government has pledged to accelerate budget spending in the second half of the year, thereby helping to dampen growth.

“The service industry has been shocked by the delta variant, continuing the current theme of a patchy recovery,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd in Hong Kong. “It’s pretty clear that the authorities would still support growth. We’re still drawing another RRR cut before the end of 2021, October at the earliest. “

High-frequency data tracked by Bloomberg’s early indicators also shows the recovery is stabilizing. Several economists have already lowered their growth forecasts for this year, although the expansion is still expected to exceed the government’s modest target of more than 6%.

The benchmark for Chinese equities, the CSI 300 index, fell 1.5% to its lowest level since August 20 on Tuesday.

What Bloomberg Economics Says … The fall in China’s contracting non-manufacturing PMI in August shows that the impact of the delta epidemic has been much more severe than expected. The fall was triggered by weak services, even as political support spurred construction. A relatively moderate slowdown in the manufacturing PMI – which has remained expanding – reassured the health of the broader recovery. Chang Shu, Chief Economist for Asia

The government has imposed strict measures, including travel restrictions, mass testing and quarantines, for about a month to bring a new wave of Covid cases under control, the most widespread outbreak since the initial outbreak in 2020. The Small business confidence during the month weakened and consumers are cutting spending. The partial closure of China’s second-largest container port has also disrupted trade.

“Today’s data again reflects the disproportionate and asymmetric shock to the services sector from the Covid-related restrictions,” said Liu Peiqian, Chinese economist at Natwest Markets in Singapore. While there is room for a rebound in the services PMI in the coming months, as the epidemic is now under control, any future national Covid epidemic will continue to weigh on the sector, he said. she declared.

Weaker demand weighed on the manufacturing sector, with the sub-index measuring new orders falling below 50 for the first time since February 2020, signaling a contraction.

Exports have also taken a hit despite some overseas buyers placing their Christmas orders earlier than in previous years, worried about the risk of shipments being delayed. The new export orders sub-index fell to 46.7 in August from 47.7 in July. Exporters have faced a number of challenges this year, such as container shortages and excessive freight charges.

Elsewhere in Asia, manufacturing is under pressure as the delta virus variant weighs on the global recovery. Japan’s industrial production fell 1.5% in July from the previous month, data showed Tuesday. Bloomberg’s trade tracker also reported a slowdown in global merchandise trade.

Other highlights from PMI data:

  • The manufacturing jobs sub-index was unchanged at 49.6; non-manufacturing employment fell to 47
  • Construction sub-index rose to 60.5 from 57.5 in July
  • Price pressures from manufacturers eased over the month, with both input and output prices declining slightly
  • The sub-indices that track large and medium-sized businesses remained above the 50 mark, indicating relatively stable trading, while the small business sub-index contracted for the fourth consecutive month in August.

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