Covid-19 delta variant pummels China’s services sector

China’s official nonmanufacturing purchasing managers index, which tracks activity in the construction and services sectors, plummeted to 47.5 in August, from 53.3 the prior month, according to data released Tuesday by the National Bureau of Statistics, breaking through the 50 mark that separates expansion from contraction.

The 47.5 reading—which fell well short of economists’ forecasts for a reading comfortably above 50—marks the first time the official measure has dropped into contractionary territory since February 2020, at the height of the initial explosion of the coronavirus, which led to the lockdown of the central Chinese province of Hubei.

Largely responsible for the drop in the nonmanufacturing measure was a significant fall in the services subindex, which slid to 45.2 in August from July’s 52.5, as the highly infectious Delta coronavirus variant dampened demand for services requiring close human-to-human contact, the statistics bureau said.

Beginning with one outbreak in the eastern city of Nanjing in late July, the Delta variant quickly spread to more than half of China’s provinces, hurting a national services sector that was still far from full recovery, the statistics bureau said.

Subindexes showing activity in ground and air transport, accommodations, catering, sports and entertainment all stumbled into contractionary territory in August, the statistics bureau said.

Outside of the services sector, China’s factories—which have powered the country’s post-pandemic recovery for more than a year—showed signs of losing steam, dragging the official manufacturing PMI down to its lowest level in 18 months.

Beijing’s manufacturing PMI dropped to 50.1 in August—down from the previous month’s 50.4 reading and falling short of the 50.2 median forecast expected by economists polled earlier by The Wall Street Journal.

As they have in recent months, global supply-chain bottlenecks and weakening overseas demand continued to weigh on Chinese factory activity in August, according to the statistics bureau, crimping the supply of raw materials on the one hand and the delivery of finished goods on the other hand.

Though the headline manufacturing PMI number remained just above the 50 mark, the subindex of new orders dropped to 49.6—the first contractionary reading since February 2020. At the same time, the subindex tracking new export orders dropped further to 46.7, for a fourth straight month in contractionary territory.

The broad-based weakness on display in Tuesday’s data release—the first reading of economic activity in August—bodes ill for other monthly economic indicators that will be released in the coming days.

Steeper-than-anticipated deceleration in July’s economic data points had already prompted many research houses and investment banks to cut their forecasts for China’s gross domestic product this year.

While Beijing has brought the latest coronavirus wave under control, with daily tallies of new symptomatic infections back into the single digits since mid-August, some of the sectoral weaknesses on display are likely to persist, said Julian Evans-Pritchard, senior China economist with Capital Economics.

Beijing’s “Covid zero" posture, which mandates crushing coronavirus outbreaks with uncompromising public-health measures, is likely to do continued damage to consumers, exporters and manufacturers, economists fear.

Meanwhile, a global shortage of semiconductors, which has hit both production and demand in the manufacturing sector, “could be a problem that lingers on into at least 2022 and perhaps even into 2023 as chip manufacturers install more production lines," said Iris Pang, an economist with ING Bank in Hong Kong. On the nonmanufacturing side, Ms. Pang said Beijing’s clampdowns on the technology and education sectors would likely take a toll for months to come.

Tuesday’s data also included some worrisome signals on the state of China’s labor market. Subindexes tracking employment in the manufacturing and nonmanufacturing sectors both weakened in August.

The slowing pace of hiring could weigh on Chinese income growth and drag further on consumption, said Bruce Pang, head of macro and strategy research at China Renaissance Securities.

Mr. Pang, who isn’t related to Iris Pang, said he now expects Beijing to lower its benchmark lending rate and make more money available for bank lending, amid rising concerns of a broader slowdown.