China economy: small businesses suffer the brunt

China economy: small businesses suffer the brunt

China's economy continued to slow down at the beginning of the year, with manufacturing output slipping and COVID-19 outbreaks curbing consumer spending.

In January, factory production and services were moderated according to the official purchasing managers surveys released on Sunday. Small businesses suffered the brunt of the pain, with a private index dropping to its lowest in almost two years.

Home sales fell and consumption was sluggish due to tighter restrictions to control the spread of the highly-contagious omicron virus variant, which adds to the woes facing the Chinese economy. The central bank is already cutting interest rates and officials pledge to more fiscal support as Beijing wants to stabilize the economy ahead of a key political leadership meeting later this year.

The weak PMI indicates that the policy easing measures from the government have not yet been passed to the real economy, Zhiwei Zhang, chief economist at Pinpoint Asset Management Ltd., wrote in a note. We expect the government to step up policy support in the coming months, particularly through more fiscal spending. The official manufacturing purchasing managers index fell to 50.1, according to the National Bureau of Statistics, slightly above the 50 mark that separates expansion from contraction. The non-manufacturing gauge, which measures activity in the construction and services sectors, fell to 51.1.

The PMI gauge of small companies dropped to 46 this month, the lowest since February 2020 and taking a contracting streak to a ninth month.

The Caixin Manufacturing Purchasing Managers Index, released on Sunday, fell to 49.1, the worst in almost two years. The private survey focuses on smaller, export-oriented firms compared to the official manufacturing PMI.

Chinese factories often see a production lull in January and February as workers head home for the Lunar New Year holidays. The government ordered steel plants to trim output in order to reduce air pollution ahead of the Winter Olympics in Beijing this year.

Chang Shu, chief Asia economist at Bloomberg Economics, said that downward pressures on the economy are expected to persist in the near term, with restrained celebrations around the Lunar New Year holiday dragging consumption and production in low gear. Shu believes that changes should cushion the slowdown, but the impact may not be visible until later in the first quarter because of the authorities' pivot to increase policy support.

The PMI sub-index for the sector dropped to 50.3, the lowest since August due to travel restrictions and lockdowns in some places. Residents in places where there have been recent outbreaks of COVID 19 have been urged not to leave the cities, including Beijing, Shanghai and the northern port city of Tianjin.

In January, manufacturers were being squeezed by higher costs, with input prices rising at the fastest rate in three months, according to the official PMI data.

Bruce Pang, of China Renaissance Securities Hong Kong said that that could drive the producer price index up and narrow the room for monetary policy.

Construction activity decreased this month, with the sub-index falling to 55.4, NBS figures show that sentiment remained subdued due to the property downturn and the limited impact that government spending on infrastructure is having so far. The approaching holiday and cold winter may have had an impact on the building.