China’s factory activity contracts again in Aug as power cuts curb output

China’s factory activity contracted in August for a second straight month, with the economy taking a hit from power shortages spurred by a historic drought, on top of a property market crisis and Covid outbreaks.

The official manufacturing purchasing managers index rose to 49.4 from 49 in July, according to a statement from the National Bureau of Statistics on Wednesday. That was slightly higher than the 49.2 in a Bloomberg survey of economists, but still below the 50 mark that separates expansion from contraction.

The non-manufacturing gauge, which measures activity in the construction and services sectors, fell to 52.6 from 53.8 in July. That was higher than the consensus forecast of 52.3.

“Power cuts and factory suspension as well as Covid outbreaks that have spread to every province have imposed a significant hurdle to production and demand,” said Bruce Pang, chief economist and head of research for Greater China at Jones Lang LaSalle Inc.

NBS analyst Zhao Qinghe also cited infections and hot weather as “negative factors,” adding that the “recovery of manufacturing production and demand still needs to be strengthened.” Zhao noted that manufacturing PMI sub-gauges measuring output and new orders both remained in contraction.

China’s benchmark CSI 300 Index of equities fell right after the release of the PMI figures, before erasing losses to trade 0.1% higher as of 10:06 a.m. local time.

China has faced pressure on multiple fronts this year, including ongoing threats of virus outbreaks and lockdowns as part of Beijing’s Covid Zero strategy. All 31 mainland provinces have recorded at least one local Covid case recently, making the current outbreak the widest since comparable data started in February 2021. Major cities like Shenzhen and Chengdu have locked down some areas and imposed mobility restrictions.

A historic drought in southwestern China has cut electricity generation at hydropower plants, adding to the economy’s woes. Sichuan province cut power to industrial users, with some factories forced to suspend activity. The province said last week it will ease power cuts as hydropower improves and temperatures start to drop.

Turmoil in the property market continues to spread, with people boycotting mortgages because of unfinished projects. The nation’s largest developer by sales posted a record profit slump this week, a sign of weakening demand among home buyers.

The government has taken several steps this month to shore up the economy, including policy rate cuts and a more than 1 trillion yuan ($145 billion) stimulus package — part of moves Premier Li Keqiang has said are “more forceful” than what happened in 2020.

Even so, economists now expect the economy to grow just 3.5% this year, according to the median estimate in a Bloomberg poll. That’s far lower than the official target of “around 5.5%” that Beijing announced earlier this year but has downplayed in recent months.

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