China’s economy reels as Beijing lifts ‘Zero-Covid’ measures

Chinese manufacturing and service-sector activity fell to their lowest levels since the initial throes of the coronavirus pandemic in early 2020, highlighting the breadth of the tumult as waves of infections roar through the world’s second-largest economy following Beijing’s abrupt decision to scrap its draconian “zero-Covid” measures.

China’s official manufacturing purchasing managers index fell to 47.0 in December, the lowest level since February 2020, when the country was first seized by the virus in the central Chinese city of Wuhan.

Far worse was the official non-manufacturing PMI, which covers service-sector and construction activity, which plunged to 41.6 from 46.7 in November, China’s National Bureau of Statistics said Saturday. That level also marks the worst showing since the historic lows of February 2020. The 50 level on the index separates expansion from contraction.

Taken together, Saturday’s downbeat data offer a first glimpse into the economic toll from Beijing’s sudden exit from its stringent Covid curbs, which caught many off guard, and damp hopes of a rapid turnaround in the final month of the year. Economists at Citi, in a Friday note to clients, wrote that China’s gross domestic product may expand by just 1% in year-over-year terms during the fourth quarter.

China began dismantling its “zero-Covid” measures of mass testing, quarantines and lockdowns in November, and lifted most of the remaining domestic Covid measures on Dec. 7, leading to surging infections that have put the country’s thinly equipped healthcare system under strain.

Earlier this week, China took another step toward reopening its borders after three years of self-imposed isolation, announcing it will scrap all quarantine measures for inbound visitors starting next month—and sparking a scramble to snap up airline tickets.

Although the lifting of pandemic restrictions removes a source of uncertainty for the economy, Saturday’s data point to a challenging winter ahead for many businesses.

Manufacturing PMI subindexes measuring factory production, total new orders and new export orders all retreated deeper into contraction in December from the preceding month. For the services sector, meanwhile, activity shrank further, tumbling to 39.4 from 45.1 in November.

China’s factories are confronting temporary labor shortages and logistics jams that have disrupted supply chains, with many experts not expecting the nationwide surge in Covid-19 infections to peak until after the Lunar New Year holiday ends in late January.

Tesla Inc. halted production at its Shanghai plant last week, extending a planned eight-day suspension at its largest plant by car output. The electric vehicle producer faces surging Covid infections among its workers and suppliers, alongside reduced global appetite for its cars.

While many factories’ operations are being hammered by infections, some businesses have gradually begun bringing back production, though levels remain short of the period before restrictions were lifted. In the central Chinese city of Zhengzhou, home to the world’s largest assembler of Apple Inc. iPhones, the Foxconn Technology Group compound has recovered to about 70% of capacity and wait times for iPhone Pro models have shortened, according to analysts and people involved in the supply chain.

Reflecting the unevenness of the recovery across different regions of China, infections in the northern cities of Beijing and Tianjin, and the southwestern city of Chengdu, appear to have peaked, Wu Zunyou, chief epidemiologist at the Chinese Center for Disease Control and Prevention, said Thursday.

Average subway ridership in Beijing, Wuhan and the northwestern city of Xi’an each rose by 70% or more for the seven days ended Thursday when compared with the week before, according to statistics from data provider Wind. But cities in southern China, including Shanghai and Shenzhen, saw subway ridership decline over the same period by this metric.

Economists also have pointed to improvements in the volume of domestic flights and holiday bookings, as well as worsening traffic congestion in big cities, as signs of a gradual, if patchy, resumption in consumer demand and mobility since restrictions were lifted.

A gauge of activity among small and midsize businesses in China compiled by economists at Standard Chartered showed a pickup in activity among manufacturers in December, but no relief in the slide in service-sector activity. The sole exceptions to the gloom were in the hotel and restaurant industries, where activity picked up markedly as testing requirements were dropped and people began to venture out, Standard Chartered economists told clients in a Dec. 20 note.

For most of the year, China had grappled with restrictive government measures to stamp out Covid outbreaks and a protracted property slump, in addition to slowing overseas demand for Chinese-made goods.

Private data indicated new-home sales continued to fall in November, the 17th consecutive month of year-over-year declines. Sales at China’s top 100 developers fell by 26% to the equivalent of about $78 billion, according to industry data provider China Real Estate Information Corp. Total sales during the first 11 months of the year fell 43% on a year-over-year basis, the data showed.

Exports, which have powered China’s growth for most of the past three years, fell at the steepest pace in more than two years in November, amid waning global demand weighed down by war in Ukraine and interest-rate increases by global central banks to tame inflation.

For the first three quarters of 2022, China’s economy grew 3%, according to official data, putting the country on track to miss by a wide margin its official growth target of around 5.5% this year. Economists now expect China to record its weakest growth in decades, excluding 2020 when the pandemic first struck.

Earlier this week, China’s statistics bureau revised the country’s economic growth for 2021 to 8.4% from the 8.1% previously reported in January, a gain set to further dwarf China’s GDP expansion this year.

In an agenda-setting policy meeting that concluded earlier this month, China’s top leadership pledged to refocus on kick-starting economic growth and reviving domestic consumption next year, striking a more pragmatic tone. He Lifeng, head of China’s top economic-planning body, is drafting a growth plan of more than 5% for next year, the Journal previously reported.

To bolster the country’s faltering economy next year, China’s finance ministry said Thursday it would increase fiscal expenditures and extend cuts in taxes and fees to support businesses. Meanwhile, the country’s central bank pledged Friday to support domestic demand and maintain effective credit growth to boost growth and employment.

“The economic recovery is still not yet solid,” the central bank said. “The pressures of shrinking demand, supply shocks and weakening expectations are still heavy.”

Over the past year, with inflation at bay, China has largely resorted to government-backed infrastructure investment to shore up its economy, and it has avoided the rate increases seen elsewhere. Beijing’s aggressive push to reopen the country has prompted global investment banks in recent weeks to raise their outlook for China’s economic growth next year. For 2023, Goldman Sachs now expects China’s economy to expand by 5.2%, from an earlier estimate of 4.8%. J.P. Morgan has lifted its forecast to 4.3% from 4.0%, while Morgan Stanley upgraded its forecast to 5.4% from 5.0%.

(This story has been published from a wire agency feed without modifications to the text.)